Investing in Altria: Bull and Bear Cases

Altria Group (MO) is a leading company in the tobacco industry, and its stocks have long been favored by investors seeking high dividend yields. However, the company's core business is currently facing serious challenges as some of its biggest growth bets have not paid off.

If you are considering investing in this tobacco giant and want to know what is in store for the company, continue reading the stock bull and bear cases presented by two Motley Fool writers.

Bear case study of Altria

As a shareholder of Altria, it may seem like an unusual choice for me to have a negative outlook on the company, but it is precisely because of my ownership that I understand why investors may – or should – proceed with caution before investing. Therefore, I believe there are three key reasons why investors should take a bearish stance on Altria.

The downfall of Juul: Despite a temporary lift on the ban of Juul Labs' e-cigarettes in the US market by an appeals court, Altria's $13 billion investment in the company remains worthless. Since Juul's e-cigarettes became the target of the US Food and Drug Administration's crackdown on youth vaping, the company has lost a significant market share. Juul previously held 75% of the market share, and now sits at second place with 29%, trailing behind the Vuse brand of British American Tobacco (BTI -0.27%). While the federal appeals court did order the agency to review Juul's application again, the damage has already been done.

Possible loss of partnership with Philip Morris: The marketing and distribution agreement between Altria and Philip Morris International is set to end due to the ban on importing its IQOS heated tobacco device into the United States. Tobacco companies worldwide are seeking ways to overturn the decision by the United States International Trade Commission, and Philip Morris has agreed to acquire Swedish Match, a top manufacturer of nicotine pouches whose Zyn brand competes directly with Altria's On! If Philip Morris chooses to enter the US market with its own future e-cigarette products, it will no longer require Altria's partnership.

The tobacco market is declining. It's no secret that smoking has been on a long-term downward trend, and while nicotine addiction has captured a certain audience, smoking's stigma hasn't disappeared. Additionally, inflation is causing some consumers to turn to lower-priced brands. Therefore, despite Altria's Marlboro brand still controlling nearly half of the cigarette market, its dominant position is continuing to weaken.

There is a strong argument against purchasing the sinful stock of Altria, although it remains a personal preference and potential choice for my investment portfolio.

The Altria Bull Market Case Study

Regulatory pressure and other factors have led to Altria significantly writing down its $12.8 billion investment in e-cigarette expert Juul, and traditional cigarette unit sales seem unlikely to see rapid growth anytime soon. However, at current prices, there are still many reasons to pay attention to the stock. The company's brand strength and addictiveness of its products give it pricing power and should continue to ensure strong sales and profits. Even better, Juul's hefty investment has no further adverse factors, and this vape company still has the potential to overcome public and regulatory pressure and release better-than-expected performance.

Altria offers an unbeatable dividend yield for its relatively stable consumer products business. Currently, the company's dividend yield is approximately 7.9% based on its stock price, with an impressive track record of dividend growth for 53 consecutive years, making it a leader in the dividend category. The business generates impressive free cash flow, indicating it is well-positioned to continue providing reliable dividend growth.

In today's volatile market, there are many reliable non-prohibited valuation stocks worth paying attention to that can generate high returns. Management guidance projects earnings growth between 4% and 7% this year, and the stock is trading at approximately 9.5 times this year's expected earnings. Therefore, Altria's stock is a worthwhile and low-risk buy for investors seeking income.

Should you buy Altria stock today?

For investors willing to invest in the stock of an unethical company, Altria's reasonable valuation and strong dividend status may make it an appealing revenue-generating tool in today's turbulent market. On the other hand, the long-term sales of the company's core tobacco business may continue to decline, and their efforts to diversify into the electronic cigarette market have produced disappointing results.

In recent times, Altria's stock has offered substantial dividend yields and should be relatively stable in a market with more volatility. However, investors should still bear in mind the company's long-term risks.

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