Think you know Altria? Here is 1 little known fact that you cannot overlook.

When most investors are looking Altria (MO -0.08%) what I see is a whopping 8% dividend yield supported by a dividend that has been raised for years. This is the type of story that most dividend investors will find attractive. But there is a big risk here because the company’s core business is in long-term decline. This risk should be understood, but there is another subtle twist that you may have overlooked.

Altria’s business is disappearing

It should come as no shock to Altria shareholders that the company’s most important business is making cigarettes. In the first half of 2024, the company generated approximately $11.8 billion in revenue. Its smoking products division’s revenue was about $10.4 billion, or 88% of the company’s top line. Clearly, smoking products are the driving force at Altria.

Image source: Getty Images.

To be fair, the company sells a variety of smoking products, including cigars. But when you look at volume, cigarettes are just over 97% of the division’s volume. So cigarettes are the big story at Altria. But as I mentioned, most investors know this fact.

The big story here isn’t the biggest deal. It is the decline that occurs in the greatest business. In the first six months of 2024, the volume of cigarettes fell by 11.5%. That’s terrible and would probably be seen as shocking to any other consumer staples company — investors would run for the hills. Except that drop is par for the course.

In 2023, the volume of cigarettes decreased by 9.9%. In 2022, volumes fell by 9.7%. In 2021, the decrease was 7.5%. You get the point, this is a dying business.

A “small” problem that cannot be overlooked

How did a company with a declining business manage to maintain its dividend, let alone increase it? The answer is that because of the nature of cigarettes, smokers tend to be very loyal. So Altria raised prices regularly to make up for the decline in volume. That’s worked well so far, but you can only milk a cash cow so hard before it goes dry. This is a bigger risk for Altria than many may realize.

Of the cigarettes Altria sells, only about 4% fall into the discount category. That means Altria’s business is basically based on premium smokes. In the premium category, “other premium” brands represent approximately 4.5% of the total volume. The remaining 91% of the company’s cigarette volume is attributable to a single brand, Marlboro.

Marlboro is a giant in the US cigarette industry with a whopping 42% market share. This could be seen as a strength. But step back for a second and think about the big picture. Altria is basically a one-trick pony in a dying rodeo. And its pony is one of the most expensive around at a time when price competition from smoking alternatives is heating up. Altria itself notes that “the rise of illicit e-vapor products” is a big problem, largely because they’re less expensive.

Fixing the problem won’t be easy

There’s only so much Altria can do about its dependence on Marlboro as the cigarette business declines. In fact, being the biggest player in the industry is probably preferable to having a second-tier brand. What he is doing is trying to expand his reach beyond cigarettes. It’s the right thing to do, but given the size of the company’s cigarette business, finding a replacement won’t be easy. After several failed attempts, including an investment in Juul and a marijuana company, Altria is currently focused on growing its recent NJOY vape acquisition.

Going well, NJOY is experiencing rapid growth as it has been introduced to Altria’s impressive distribution system. To put a number on this, in the second quarter of 2024 NJOY shipment volume increased by 14.7% compared to the first quarter, and NJOY device shipments increased by 80%. The problem is that NJOY is small, falling under Altria’s “all other products” revenue category, which accounted for just $22 million in revenue in the first half of 2024 at a company with nearly $11.8 billion in revenue . So NJOY is barely a rounding error. Marlboro is the key to Altria’s future and will likely remain the key for years to come.

If Altria hits a tipping point, it could deteriorate quickly

A consumer staples company can only raise prices so far before there is a consumer backlash. The easy change with cigarettes is to buy cheaper smokes, which Altria really doesn’t sell. Then there are alternatives to worry about, like the company’s flagship vaping. Although Marlboro kept its own position, in 2021 the market share was 43.1%. It is 1.1 percentage points above the current level.

If Marlboro falters, Altria could fall. This is a “small” fact that many investors probably don’t consider when looking at the huge dividend yield. Basically, there is more risk of concentration here than many people realize.