Altria's Problems Go Deeper Than Just Falling Tobacco Sales

Smoking rates have been declining significantly for decades. According to the American Lung Association, less than 12% of adults smoked in 2022, compared to nearly 43% in 1965. It's a trend that's likely to continue as people become more health-conscious and learn more about the dangers of smoking.

For Altria (NYSE: MO), it means more pressure from investors for the business to diversify into other products. Smokeable products still account for the vast majority of its sales. But drastically changing its sales mix won't be easy or perhaps even possible anytime soon. And one area of its business, which looked like it might be a good growth opportunity, isn't faring well.

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The company's e-vapor business is facing significant competition from the illicit market

Altria has been looking for ways to expand and diversify its growth opportunities so that it's less dependent on smokeable products. One of those ways is focusing on e-vapor products. However, the company says that while the market expanded at a rate of 30% last year, the problem is that the illicit market has 60% market share. While regulators have been trying to stop that, Altria says that enforcement actions simply haven't had much of an effect.

In 2023, Altria acquired e-cigarette company Njoy. At the time, it believed that the deal would have a positive effect on cash flow by 2025 and be accretive to its adjusted earnings by 2026. But given the obstacles in the illicit markets, Altria has raised doubts about whether those targets will be achievable.

Can the business find a way to grow?

The big question for investors, when deciding whether to invest in Altria, is if the company has a way to grow in the long run. The trend hasn't been an encouraging one for Altria, whose revenue growth rate has often been below zero in recent years.

MO Operating Revenue (Quarterly YoY Growth) data by YCharts.

By and large, Altria is still mainly a tobacco company, and that isn't changing anytime soon. For the last three months of 2024, the company's smokeable tobacco products totaled $5.3 billion and accounted for 88% of its revenue. Oral tobacco products made up nearly 12%. The company's new product platforms and technologies, as well as Njoy, are in its "all other" category -- that segment contributed just $19 million in revenue last quarter.

Even if the vape business was doing well and Njoy's sales were taking off, they likely wouldn't be making much of a dent in the company's overall sales. Altria needs something much bigger to grow its top line and for it to offset the decline in tobacco-related sales in the long run.

Altria looks like a potential value trap

There isn't much of a reason to be bullish on Altria's stock right now. One thing that may look appealing is its dividend. It yields 7.8%, which is more than 6 times the S&P 500 average of 1.2%. But with the business facing a questionable road ahead, investors should be careful not to assume the dividend will be safe just because Altria has been paying it for decades.

Investors may also think it's a cheap buy, as it trades at just 8 times its trailing earnings. However, if the business' top and bottom lines decline in the future, it could quickly end up looking much more expensive, which is why I think the stock is a potential value trap.

Altria is full of risk, and there are many better dividend stocks to buy instead.

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.