Inflation could cause headaches for this dividend king

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tobacco giant Altria Group (MONTH 0.71% ) has been one of the most enduring businesses in America. The Dividend King has increased its dividend payouts for 52 consecutive years, and the addictive properties of tobacco have allowed companies like Altria to slowly and steadily raise the price of cigarettes to compensate for a declining smoking rate in the United States. since the 1960s.

Today we are in a high inflation economy, where the prices of food, gas and other commodities are rising at their fastest rate in decades. While Altria’s business may prove sustainable despite this challenge, investors should at least worry about how inflation might affect the company.

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Consider the finances of American smokers

Studies have tracked tobacco users by income bracket, and according to the US Centers for Disease Control and Prevention, smoking is significantly more common among people from lower-income households.

The median income for an American household in 2020 was just over $65,000 per year. According to the CDC, more than 32% of US households with an annual income of $20,000 or less are smokers. Among those with incomes between $20,000 and $40,000, the share of households with smokers drops to about 26%. For households with incomes between $50,000 and $99,000, the proportion of smokers drops even further to 18%, while only 12% of households with incomes of $100,000 or more have a smoker.

So while everyone is going to feel the impact of higher gas prices, more expensive groceries, and higher payments for vehicles and housing, the lower a person’s income, the more likely today’s higher prices are to impact its discretionary income. And the lower your household income, the more likely you are to be a customer of a tobacco company.

Will Marlboro be a budget cut for smokers?

Marlboro is Altria’s flagship cigarette brand and the nation’s most popular cigarette. The company estimates that Marlboro controls 43.1% of the overall retail market and 57.7% of the premium segment.

But smokers feeling financial pressure due to inflation might start turning to cheaper brands to save money. Marlboro is about 39% more expensive than Altria’s cheapest brand. Clearly, therefore, if many smokers quit Marlboro, the result would hurt Altria’s revenues and profits.

Can Altria handle people dropping out of Marlboro?

I don’t want to give anyone the impression that Altria is in trouble. The company is a cash flow machine that turns a whopping $0.39 of every revenue dollar into free cash flow, and most of that goes to the company’s big dividend. Altria’s revenue was $26 billion in 2021. The tobacco giant is doing very well.

Altria also has $4.5 billion in cash and cash equivalents on its books, so it’s not lacking in financial security. But if prolonged inflation causes more people to downgrade to cheaper cigarettes, it could delay some of Altria’s significant cash flow.

This would likely trickle down to shareholders in the form of small dividend increases, fewer share buybacks, or management’s reluctance to make strategic acquisitions. I’m not saying these are all things investors should worry about today, but it will be worth watching Altria’s profit margins over the coming quarters to see if there are any signs of weakness. Marlboro has long been Altria’s “golden goose” brand, so investors should take any potential threats to its sales seriously.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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