Where Will Altria Stock Be In 5 Years?

There's one number that keeps investors interested in Altria (NYSE: MO): the stock's huge 8.4% dividend yield. But consumer staples companies don't get yields like that for no reason. There's also significant risk involved in owning this troubled stock.

Although the past doesn't predict the future, extrapolating a key statistic regarding Altria over time should still send a shudder through the spines of most investors considering this stock. Let's look at where Altria is likely to be in five years and what that might mean for the stock.

Altria's stock price is down a lot

Altria is a consumer staples company, which is a sector generally known for containing reliable stocks that grow slowly over time. That makes sense given consumer staples businesses tend to sell small necessity items that get purchased regularly.

So what has happened to Altria? Its stock price has declined more than 40% from its 2017 highs.

MO data by YCharts

The answer is fairly simple. Altria sells cigarettes, and there is a notable shift away from this product in the U.S. market, where smoking is increasingly frowned upon by regulators and consumers. That has resulted in ongoing declines in the number of cigarettes that it has been able to sell.

To the company's credit, it has been handling the falling volume fairly well. Because of the addictive nature of nicotine, Altria has been able to increase prices to offset the impact of the volume declines. That's allowed it to continue raising the dividend despite what is a very significant business headwind.

A look at Altria's shrinking volume

Here's the thing: When you dig into the cigarette business a bit more, you see that the fundamentals of Altria's most important segment are bad and only getting worse. In 2017, Altria produced 116.6 billion cigarettes, down 5.1% from 2016 levels. The percentage declines in the years following 2017 were 5.8% in 2018, 7.3% in 2019, 0.4% in 2020 (a year impacted by the coronavirus pandemic), 7.5% in 2021, 9.7% in 2022, and 9.9% in 2023. In 2023, the company produced 76.3 billion cigarettes, or roughly 35% less than what it manufactured in 2017.

That's a terrible trend overall, especially if you pay special attention to the pace of deterioration. If you pull out 2020's change (which is an anomaly because of the pandemic), the declines get worse with each passing year. At nearly 10% in 2023, this volume decline is starting to look like a downward spiral that's getting out of control. If you take 76.3 billion and assume roughly 10% decreases in each of the next five years, Altria's production will fall by another 45% or so in very short order.

Altria is trying to build up other lines of business, most recently buying vape maker NJOY. However, it hasn't been achieving the necessary levels of success in its diversification efforts so far to replace the lost volume. It didn't help that some bad investments led to multibillion-dollar charges for missteps in the vape space (related to an investment in Juul) and in the marijuana sector.

So while Altria isn't sticking its head in the sand here, it also hasn't proven it knows how to deal with the ongoing troubles in its most important segment. And if it can't stop the bleeding, or find a new growth platform very quickly, the cigarette business could soon turn into a very ugly story. Price increases probably won't be enough to save Altria, and could even make matters worse.

Only aggressive investors should buy Altria

If you are a dividend investor in search of a high yield, you'll find it in Altria. But given the deteriorating trends in its largest segment, most investors will probably be better off passing on the stock. Indeed, only the most aggressive investors will probably want to take on the risk that Altria's core division shrinks dramatically before the company manages to find -- and grow -- a new business to replace it.

Should you invest $1,000 in Altria Group right now?

Before you buy stock in Altria Group, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Altria Group wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $671,728!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of June 3, 2024

Reuben Gregg Brewer 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.