The consumer staples company, Altria (NYSE:MO), well-known for its high dividend yield of 9.37%, has been under scrutiny as the long-term sustainability of its business model comes into question. The company's dividend, which has been increased annually for 54 consecutive years, is currently safe with a payout ratio of about 100% and a cash dividend payout ratio of roughly 80%. However, the declining volume of cigarette sales poses a significant challenge to Altria's business.
Altria's Marlboro, the largest cigarette brand in the U.S., holds a substantial 42% market share. Despite this dominance, the company's cigarette business is experiencing a long-term secular decline, with smoking habits becoming increasingly less popular. In Q2 2023, Altria sold approximately 21 billion cigarettes, down from nearly 23 billion in the same quarter of the previous year — an 8% decline in volume. This trend isn't new; over the past five years, since Q2 2018, the company's volume has fallen by almost 25%, from around 27.7 billion cigarettes.
To maintain its growing dividend amidst falling sales, Altria has been increasing cigarette prices. However, this strategy may not be sustainable in the long term as it risks exacerbating volume decline. The company's attempts to diversify into marijuana and vaping have so far not been successful. Although Altria recently purchased NJOY in another attempt to break into the vaping market, past failures warrant caution from investors.
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