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I Wouldn't Touch This Stock With a 10-Foot Pole: Here's What I'd Buy Instead

I like to buy companies with long histories of dividend increases while they are offering historically high dividend yields. On the surface, that would suggest that I might want to buy Altria (NYSE: MO) and its huge 8.7% yield. No, thanks: I'd rather own Hormel Foods (NYSE: HRL) and its much lower 3.1% yield. Here's why.

Altria's core business is shrinking fast

Altria's biggest business is selling cigarettes, with its iconic Marlboro brand having a massive 42% market share in the U.S. market. The problem is that the company's volume has been in a steady decline for years, as smoking has increasingly fallen out of favor. To put a number on that, first quarter 2024 volume declined 10% year over year. That's not an anomaly, with the company consistently raising prices to offset the volume declines it has faced.

A balance showing risk and reward.

Image source: Getty Images.

Price hikes have protected the dividend and even allowed Altria to increase the quarterly payment steadily. At some point, however, price increases will likely exacerbate the declines in the steadily shrinking cigarette business. Worse, the company has made several strategic missteps as it has tried adjusting to the changing cigarette space. That includes spinning off its foreign operations as Philip Morris International (NYSE: PM), a move that effectively created a new competitor in smoking alternatives like vapes. And Altria's early investments in vapes and marijuana both led to massive write-downs, effectively costing shareholders a lot of money.

Even though Altria's yield is historically high, I don't like the business enough to buy. I'd rather own a lower yielding stock like Hormel Foods, which has a much more attractive business.

Hormel has problems, too

Hormel's yield is just 3.1%, but that happens to be near the highest levels in the company's history. Notably, it has increased its dividend annually for over five decades, making it a Dividend King. The key here, however, is that I believe the problems facing Hormel are temporary.

For example, the food maker has been having less success than peers in passing on rising costs. Time should fix the pricing headings even though margins are being crimped in the near term. Avian flu has caused disruptions in its turkey operations. There's only so much that Hormel can do here, but this isn't a new issue and it impacts the entire industry. Avian flu is likely to be less of an issue over time. China's post-COVID reopening hasn't gone as quickly as hoped. Once again, given enough time, Chinese consumers will probably start buying again. Lastly, the company's acquisition of Planters came just as the nut segment of the snack category started slowing down. Platners is outperforming the industry, so, one more time, it seems like time will heal this wound when nuts come back into favor.

Taken together all of these problems seem daunting. Taken one by one, however, each one is surmountable in time. This is why investors will probably want to look at the stock while it is so deeply out of favor. Notably, fiscal first quarter 2024 earnings showed broad-based improvement, with volume growth in every division. One quarter isn't a trend, and the company still has headwinds to address, but it seems likely that Hormel will start to regain its footing.

Investing is about balancing risk and reward

At the end of the day, when I look at Altria I see a business that is in a secular decline. And, worse, the efforts management has undertaken to solve the problem have only made things worse. A high yield isn't enough to offset the risk I see at Altria. Hormel, on the other hand, has a diversified portfolio of food products that are most likely facing temporary headwinds. Although the yield is far lower, it is still historically high for Hormel. I'm happy to own the stock and collect that dividend as management works through its turnaround effort.

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Reuben Gregg Brewer has positions in Hormel Foods. The Motley Fool recommends Philip Morris International. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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