Altria's Shares Rallied, but Is the Stock a Buy?

Altria Group, Inc. (NYSE: MO) shares have surged over 30% in the past year, with a particularly strong rally following its third-quarter 2024 earnings report. However, investors should dig deeper into the numbers before making a decision on whether to buy the stock.
**Understanding Altria's Core Business**
Altria is a high-end branded cigarette company, with cigarettes accounting for 88% of its revenue. Marlboro, its flagship brand, contributes over 90% of cigarette volume. Despite the company's efforts to diversify into next-generation products like vaping and oral nicotine pouches, its core cigarette business remains a significant driver of revenue.
**The Impact of Declining Cigarette Sales**
Altria's cigarette sales have been declining for decades, with smoking rates in the U.S. steadily decreasing since the mid-1960s. In the third quarter of 2024, Altria's smokeable product volumes fell by 8.4% year over year. Despite price increases, the company's revenue declined by 2.5% through the first nine months of the year.

**Diversification Efforts and Next-Generation Products**
Altria has been investing in next-generation products to adapt to changing consumer preferences and regulatory pressures. Its acquisition of NJOY, an e-vaping company, has shown promising growth. In the third quarter of 2024, NJOY's consumables shipment volume rose 15.6% year over year, and its devices shipments increased by more than 100%. However, these products still account for much less than 1% of Altria's total revenue.

**Dividend Yield and Payout Ratio**
Altria's dividend yield is currently around 7.5%, which is attractive to income-focused investors. However, long-term dividend investors should question how long this yield can be sustained given the company's reliance on a declining core business. Altria's dividend payout ratio is manageable at 80% of cash flow, but investors should monitor the company's ability to maintain and grow its dividend payments as cigarette sales continue to decline.
**Investment Thesis and Final Thoughts**
Altria's recent share price rally may be enticing, but investors should be cautious about the company's long-term prospects. While its dividend yield is attractive, the company's heavy reliance on cigarette sales exposes it to significant risks. Altria's efforts to diversify into next-generation products are promising, but these products are still a small part of its overall revenue. Investors should follow the stock closely and consider the potential long-term effects of regulatory pressures and consumer trends on Altria's earnings and stock price.
In conclusion, while Altria's shares have rallied, the stock may not be a buy for long-term investors seeking exposure to the tobacco industry. The company's heavy reliance on cigarette sales, declining revenue, and uncertain growth prospects in next-generation products make it a risky investment. Investors should carefully consider the potential risks and rewards before making a decision on whether to buy Altria's stock.