Shareholders in Altria Group (NYSE: MO) have been happy with the stock's long-term performance. 2016 was another banner year for the cigarette giant, as its stock posted a total return of 20%. Yet even though Altria has been good at fending off a host of potential threats, investors still have to be aware of the risks involved in owning the stock. Below, we'll look at three reasons why its stock might face downward pressure in 2017.
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Image source: Altria Group.
1. The Federal Reserve's interest rate increases could make Altria stock less attractive to income investors.
Altria has a dividend yield that's well above average, currently at 3.6%. Those dividends have traditionally been a big part of Altria's total return, and after last year's 8% boost to its dividend, Altria lengthened its impressive streak of dividend increases to 50 over the past 47 years. Investors almost take it for granted that Altria will be able to keep its quarterly payouts rising indefinitely into the future.
However, in recent years, some income investors have moved to stocks like Altria because of the low rates on more traditional fixed-income alternatives, such as bonds. Treasury yields are below 3% even for 30-year bonds, and those who want to lock up their money for shorter periods of time have to accept lower rates or take on greater risk in the corporate or municipal bond markets.
The Federal Reserve's December interest rate increase was just a quarter percentage point, but the central bank also foresees making several more hikes throughout 2017. If that sends longer-term bond yields up as well, then some investors who had turned to Altria simply for its yield could reverse course and go back to bonds. That could exacerbate downward movement in a stock that's already at least somewhat sensitive to rate moves because of its slow-growth business. That shouldn't affect the argument that long-term shareholders will make that Altria's dividend growth makes it favorable to bonds, but it does pose at least a short-term threat to the stock.
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2. Expectations for accelerating income growth could prove overly optimistic.
Altria's primary business faces the constant challenge of having to overcome a steady decline in cigarette smoking. Over the decades, a huge drop in the percentage of Americans who smoke has forced Altria to adjust to falling demand by using pricing power to earn more profit from loyal customers.
Investors expect that strategy to work in 2017 as well. They acknowledge that revenue growth is likely to slow, falling from nearly 3% in 2016 to around 2% for 2017. Yet they believe that net income growth will accelerate, rising from around 8% for the full 2016 year to more than 10% this year.
It's true that Altria has worked on reaping greater internal efficiencies that can boost profit even in an environment of slow revenue growth. Yet with potential headwinds like rising gasoline prices and higher cigarette taxes in some states, its earnings might not be able to reach the high target that some shareholders have set for the company. If Altria misses expectations, then the stock will probably fall in response.
3. The new Anheuser-Busch InBev investment might not go as well as planned.
Finally, investors also have high expectations that the recent merger of SABMiller with Anheuser-Busch InBev (NYSE: BUD) will produce superior exposure to the global beer market. Indeed, one of the selling points for the merger was the fact that the combined A-B InBev and SABMiller would command a greater portion of the global beer market, even after taking into account the required divestitures that the companies had to make in order to satisfy antitrust concerns among regulators.
However, Anheuser-Busch will have to do its part to satisfy skeptics and produce the growth that they want to see. In its final earnings report prior to the merger, A-B InBev saw sales fall 2.3%, with a nearly 20% drop in profit. Although organic revenue growth came in at nearly 3%, total volume declined nearly 1% during the year, with weakness in Brazil weighing particularly hard on Anheuser-Busch. Yet performance in the U.S. market was also subpar, and it's apparent that stronger competition will put pressure on A-B InBev for the foreseeable future. If the pass-through earnings that Altria gets from its 10% stake in A-B InBev aren't high enough, it could lead to investors dissatisfaction with the tobacco giant as well.
Altria stock climbed impressively in 2016, but even Altria has dealt with downturns in the past. If the issues above don't go well for Altria, then it's entirely possible that 2017 won't be as kind to shareholders as last year was.
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