Nicotine's Future Looks to Be Smoke-Free -- But Ultra-High-Yield Altria Is Falling Behind

Altria (NYSE: MO) has multiple problems on its hands. The biggest is that demand for cigarettes, its largest product, is in decline. Yet, the company is talking up the opportunities it has in front of it. But the very opportunity set management is highlighting seems to show that Altria is falling behind. Here's what you need to know.

What does Altria do?

Altria's largest business is selling cigarettes. Smokeable tobacco products accounted for 88% of the company's revenues in 2024, and cigarettes represented nearly 98% of smokeable tobacco volumes. Very clearly, cigarettes are vital to the company's financial success right now.

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That's a problem, because Altria's cigarette volumes have been in decline for years. In 2024, for example, volume dropped a huge 10.2%. The company has been offsetting volume declines with price hikes, so the hit hasn't been all that bad. Revenues dropped 1.3%, and adjusted earnings actually rose 3.4%. The company even raised its dividend, again, in 2024.

The stock's ultra-high 7% or so dividend yield is both a sign of the risks Altria is facing and a strong temptation. In fact, many dividend investors point to the dividend growth as a sign that Altria is a rock solid company, despite the terrible trends in its most important business. Taking that position could end up being a big problem.

Do Altria's clouds have silver linings, or are they just dark clouds?

Altria itself highlights the problems it is facing when it discusses its business. Specifically, in a recent presentation, management noted that the number of smokers in the United States fell from 34 million in 2019 to 28 million in 2024. The number of people using combustible and non-combustible products (things like nicotine pouches and vape products) stayed the same at roughly 8 million in both periods. But the number of non-combustible-only consumers rose from 11 million to 18 million.

The growth in non-combustible consumers was a huge 60% between the two periods. That growth actually helped the nicotine category grow from 53 million customers to 55 million. So this is an important category for the future. Altria believes that it is a huge opportunity, but that just isn't what it has been so far.

Here's the problem: Altria has made a number of deals in the past to position itself for the future, and it hasn't gone well for shareholders. For example, Altria spun off Philip Morris International, a move that left Altria focused on a cigarette market that would end up seeing increasing demand declines. Worse, the spinoff also created a new competitor in the non-combustion space that is now so important.

Altria also bought into vape maker Juul, and a marijuana company. But both investments flamed out and resulted in billions of dollars' worth of write-offs. And while Altria's more recent purchase of NJOY has been faring better from a sales perspective, NJOY is embroiled in patent litigation with Juul. It seems like Altria could have seen that coming, given its previous investment in Juul.

Essentially, Altria appears to have made misstep after misstep when it comes to adjusting its business to the changing nature of customer demand. This brings up one more interesting fact. In 2019, non-smokeable products accounted for roughly 12.4% of Altria's revenues. In 2024, that figure had fallen to 11.7%. While both of those figures round to 12%, they are far below the 33% of consumers that are in the non-combustible category. The complete lack of growth is shocking, given that the non-combustible category grew 60% between the two years.

An opportunity that Altria has been missing

Clearly, when it comes to nicotine products, non-combustible products are the place to be. Only Altria has been noticeably absent on that front for years, missing the changes it is now highlighting as an opportunity. It has clearly fallen behind this important trend. Although it's working to catch up, a history of business missteps doesn't instill confidence in the future. This ultra-high-yield stock probably isn't a good call for most long-term dividend investors.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Philip Morris International. The Motley Fool has a disclosure policy.