Altria shares rise despite business woes: The Wall Street paradox.

Altria (MO -1.21%) he’s basically a one-trick pony when it comes to what he sells. Combustible tobacco products — mostly cigarettes — make up about 88 percent of the top line. This has long been seen as a problem by investors, but recently some small positives have made investors willing to overlook the very real problems facing Altria.

Altria’s biggest problem hasn’t changed

Cigarette sales volume is in secular decline: That’s the central truth investors must recognize when examining Altria as a business. To put some details, the number of cigarettes sold by the company in 2023 decreased by 9.9%. In 2022, the number of smokes sold decreased by 9.7%. And in 2021, the decrease was 7.5%. It’s only been three years, and the downward trend has been going on for much longer. To bring it up to date, meanwhile, in the first half of 2024, cigarette volumes fell by 11.5% year-on-year.

Image source: Getty Images.

For the company and its shareholders, this is not a positive thing.

To be fair, so far the company has been able to raise its per-pack prices more than enough to offset the impact of these volume declines on its bottom line. But Altria can only keep raising the prices smokers pay for so long before that strategy hits its limits. Even considering the addictive nature of nicotine, it’s normal for consumer product companies to lose customers as prices rise. At some point, if price increases go too far, they reach a tipping point and volume decreases begin to affect both the top and bottom lines.

Altria may still have more room to raise prices, but logically it can’t get to the point where it’s charging hundreds of dollars for a package. There must be an upper limit.

What’s interesting is that some investors are so enamored with Altria’s high dividend yield of about 8% that they’re willing to overlook the fundamental problems facing the company. And Wall Street seems happy to see the minuscule positives as huge opportunities. For example, Altria recently bought vape maker NJOY and is having strong initial success as it connects the product to its massive distribution system. But NJOY’s revenue is so low that the unit still lives in an “other” revenue category that accounted for just $22 million of the company’s $11.7 billion in revenue in the first half of the year. That’s practically irrelevant.

A quick stock chart comparison

The chart below compares Altria’s stock price over the past year with that of Hormel (HRL -1.36%)a packaged food manufacturer. Notice that Altria’s stock rose while Hormel’s stock did not.

HRL data by YCharts.

So what’s going on? Hormel’s volume rose just 0.5% in 2021. Volume then fell 8.2% in 2022. It fell another 4.2% in 2023. And it was down 2.3% in the first nine months of fiscal year 2024. Investors are unhappy with this trend. To be fair, Hormel has not been as successful in passing on price increases to consumers as Altria has been. However, the stock’s price action was what you’d expect based on the decline in its sales volume. And those volume trends are directionally similar to what’s happening at Altria, though not quite as bad.

And yet Altria’s volume woes don’t seem to bother Wall Street today, despite the very real fact that they reflect an existential risk to the company’s biggest business. In fact, the trends may be getting worse. In the second quarter, cigarette volume fell 13% year-over-year.

A high risk stock despite its high yield

Wall Street often grabs a story and runs with it, but sometimes the story isn’t the one investors should be paying attention to. It’s a paradox of investing: Emotions can influence investors to the point where they ignore the most important facts facing a company.

Before you invest in Altria and its clearly declining cigarette business, ask yourself whether the positives offered by the still-tiny NJOY are enough to offset the fundamental headwinds affecting its most financially important division. You might think NJOY will be a transformative investment, but until there’s a lot of evidence to support that premise, Altria will remain a risky dividend stock that only the most aggressive investors should consider.