In light of recent news, should you steer clear of Altria Group Inc. (NYSE: MO)?
Let's take a quick look at what's happening. The federal government has made plans to slash nicotine levels and enforce a maximum nicotine level in cigarettes and other combusted tobacco products in order to curb addiction. The ban aims to reduce youth use and reduce deaths (480,000 people die yearly from a smoking-attributed disease). The Food and Drug Administration (FDA) also banned the e-cigarette Juul (including its vaping device, tobacco, and menthol-flavored cartridges) earlier this summer, citing health and safety issues.
A day after the ban, the company incurred an emergency motion appealing the sales ban, calling it an “extraordinary and unlawful action” by the FDA.
So, what does that mean for investors? Should you still buy Altria for dividend returns? Let's take a look at the history of Altria, the pros and cons of Altria stock and how to evaluate Altria for your own portfolio. Let's dig in.
History of Altria Stock
Altria Group, Inc., headquartered in Richmond, Virginia, manufactures and sells smokable and oral tobacco products (under the Marlboro brand), cigars and pipe tobacco (Black & Mild brand), and smokeless tobacco products (Copenhagen, Skoal, Red Seal and Husky brands) as well as oral nicotine pouches.
George Weyman, inventor of Copenhagen snuff, opened a tobacconist shop in Pittsburgh in 1822, the precursor to the U.S. Smokeless Tobacco Company, Inc. Meanwhile, John Middleton established a tobacco shop in 1856 in Philadelphia, the mom-and-pop shop that later became John Middleton, Inc. Philip Morris & Co. Ltd. was incorporated in New York City and then selected Richmond as its new manufacturing hub, becoming the largest seller of tobacco in the United States.
Legal battles ensued between Philip Morris International Inc. and Altria Group Inc. over payouts to shareholders and smoking lawsuits. Altria became the parent company of Philip Morris USA (producer of Marlboro cigarettes), John Middleton, Inc., U.S. Smokeless Tobacco Company, Inc., and Philip Morris Capital Corporation. Altria has large minority stakes in Belgium-based brewer ABInBev, the Cronos Group and Juul.
The all-time high Altria stock closing price was $89.40 on January 11, 2007, while the average Altria stock price for the last 52 weeks was $49.08. Ultimately, revenue has shown small growth and modest declines this year. Altria stock fell 9% as soon as the Wall Street Journal reported news on the Juul ban but has rebounded slightly after an appeals court temporarily blocked the FDA ban on products sold by Juul.
Pros and Cons of Altria Stock
Let's go over the pros and cons of Altria stock — there are concrete reasons why you might want to buy and why you might want to steer clear of the stock altogether.
Let's take a look at some benefits of investing in Altria first:
- Investment in cannabis: Altria invested in Canadian-based Cronos Group (NASDAQ: CRON), a $1.8 billion investment. Investing in cannabis could help Altria grow in a different direction besides cigarettes and Juul.
- Product addictiveness: One of the best reasons to own Altria is that it sells an addictive product, if you're not into socially responsible investing, that is. If consumers have to have it, it's likely that you'll be able to count on consumers continuing to need it over time.
- Manages revenue: Despite U.S. smoking declines, Altria can raise prices to offset declining unit sales and excise taxes. The average cost of a pack of cigarettes is $6.28, according to the National Cancer Institute. This means that a pack-a-day habit can cost you about $2,292 per year. A reliable business that generates cash flow each year, Altria will likely be able to continue churning out dividends.
- Impressive dividend yield: With a dividend yield of 8.60%, a $3.60 annual dividend, and a 13-year dividend increase, the numbers speak for themselves. If Altria continues in this same vein, it could become one of the elite Dividend Aristocrats.
Now, the downsides:
- Sales volume declines: Cigarette sales have still declined despite the addictiveness of the products Altria sells. A nod toward healthier lifestyles, increasing health care costs and an uptick in inflation could be encouraging people to quit. Unfortunately, Altria will have to develop other arms of the business in order to keep up.
- Bad for ESG: If you're an ESG buff (if you invest based on environmental, social, and governance criteria), you're likely to shy away from Altria and a lot of other investors will continue to do the same, in record numbers. ESG is in and anything else usually just gets thrown by the wayside.
- Uncertain future: Altria may continue dodging the government for the foreseeable future. The health downsides of smoking could cause health regulators to ban cigarettes forever as we've seen in the case of Juul.
Is Altria Still a Good Dividend Stock?
Despite the appeal, the Juul ruling may bode for a rough-and-tumble future for Altria. However, it may show the business it needs to develop more octopus-like arms of the business and diversify further — we're looking at you, cannabis! Shareholders may not want to give up on Altria completely despite this blip. The tobacco industry has withstood a lot of blips among the just-say-no crowd and investors just might be impressed by how the company weathers this recent storm and how it swivels to meet its challenges.
So, how to evaluate Juul for your own portfolio? It's impossible to know where the headwinds will blow but it's important to focus on the fundamentals. MO stock is currently trading at around 43 with a 79 composite rating and a 76 EPS rating.
In addition to evaluating the fundamentals, we always encourage investors to look at their personal goals. What are your long-, mid-and short-term financial goals? Saving for retirement or paying off your mortgage? What do you want to accomplish over the course of three to 10 years or fewer?
It's important to invest based on these goals for your future to determine whether Altria deserves a place in your portfolio.
Learn more: Is Coca-Cola (NYSE: KO) a Good Dividend Stock?