British American Tobacco vs. Altria: A Deep Dive into Volume Performance

In the competitive landscape of tobacco stocks, British American Tobacco (NYSE: BTI) and Altria (NYSE: MO) stand out with their attractive yields of 7.7% and 7.4%, respectively. This is a stark contrast to the S&P 500 index, which yields a mere 1.2%, and the average consumer staples stock at approximately 2.7%. However, both companies face a significant challenge: the declining demand for their primary product, cigarettes.

The Decline of Cigarette Sales

The perception of smoking has shifted dramatically over the years. Once considered a symbol of sophistication, the reality of cigarettes being addictive and carcinogenic has led to a long-term decline in consumption. This trend is particularly pronounced in North America, where Altria primarily operates. However, British American Tobacco, with its global reach, is not immune to these challenges.

Volume Trends: Altria vs. British American Tobacco

The statistics surrounding cigarette volume sales are alarming. Altria has experienced a staggering decline in volume, with drops of 9.7% in 2022, 9.9% in 2023, and an anticipated 10.2% in 2024. This alarming trend raises concerns among investors, as it indicates a worsening situation for the company.

On the other hand, British American Tobacco has managed to mitigate some of the impacts of declining volumes through its global diversification strategy. In 2022, the company reported a volume decline of 5.1%, followed by a 5.3% drop in 2023, and a slight recovery to 5% in 2024. Notably, these figures exclude the effects of the divestiture of its Russian and Belarus operations, which further complicates the analysis.

Price Increases: A Temporary Solution?

Both Altria and British American Tobacco have adopted a similar strategy to combat falling volumes: raising prices. This approach has allowed both companies to maintain and even grow their dividends, despite the ongoing loss of customers. However, there is a growing concern that this strategy may not be sustainable in the long run. As prices continue to rise, there may come a tipping point where consumers begin to abandon the products altogether, exacerbating the decline in volume.

Altria’s Struggles and British American Tobacco’s Global Strategy

Altria’s recent volume trends suggest that the company may be nearing this inflection point. The maker of Marlboro cigarettes is facing increasing pressure as it attempts to balance price hikes with consumer retention. Meanwhile, British American Tobacco benefits from its international presence, which helps cushion the blow from declining U.S. sales.

However, a significant development occurred in 2023 when British American Tobacco revised its accounting practices for its U.S. brands. This change effectively acknowledged that these brands may lose substantial value within the next 30 years, highlighting the severe challenges facing both the company and the tobacco industry as a whole.

Is Tobacco a Viable Investment?

For investors considering a long-term commitment to the tobacco industry, the question arises: Is this sector a wise investment choice? Given the ongoing decline in cigarette consumption and the industry’s challenges, many investors may conclude that the risks outweigh the potential rewards. This is especially true for those who rely on their stock portfolios for income.

In conclusion, while British American Tobacco currently appears to have stronger fundamentals compared to Altria, the overarching question remains whether investing in tobacco is prudent in today’s market. As the industry grapples with declining volumes and changing consumer attitudes, investors must carefully weigh their options before making a decision.

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