Altria (NYSE: MO) and Costco (NASDAQ: COST) are pretty different companies, but they share a subtle similarity. What is that similarity? Extremely loyal customers. But there are very real issues for investors to consider with each company before buying in. Here's what you need to know.
What does Altria do?
Altria's biggest business is selling high-end cigarettes under the iconic Marlboro brand. After spinning off its foreign operations into Philip Morris International (NYSE: PM), Altria only operates in the U.S. market. That said, the nicotine that cigarettes deliver can be addictive, leading to those highly loyal customers noted above. This has been very important for Altria in recent years.
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Despite the addicting nature of cigarettes, cigarette volumes have been in a steady decline. That's across the industry, not just an Altria issue. The way cigarette makers have been combating the negative volume trends is by increasing prices. So far, the most loyal customers have been willing to pay up for their favorite smokes. And that has allowed Altria to support and grow its dividend. That said, Wall Street is clearly worried about the sustainability of these conflicting trends over time, since the stock offers a lofty 7.9% dividend yield.
What does Costco do?
Costco is a club store. This is a unique kind of store where customers pay a yearly membership fee for the privilege of shopping there. Costco is one of the largest club stores in the United States, though it is important to note that it has a global presence. What's interesting here is that having the revenue from membership fees allows Costco to keep its prices ultra low. That, in turn, keeps customers happy, so they're willing to keep paying their membership fees year in and year out.
This is no small issue. Costco's membership renewal rate is routinely in the 90% range. That means that happy customers are kind of like annuities. As for the membership fees, well, they made up a little under 2% of revenues in the fiscal first quarter of 2025 but, given there's virtually no cost associated with membership revenues, they were just over 50% of operating income. Loyal customers are the name of the game at Costco.
Costco or Altria? Which is better...
So the trade-off with Altria is that investors are collecting a high yield but its business is slowly dying. That's not a great trade-off if you have a long-term investment horizon. If you are focused on the short term and on maximizing dividend income, Altria might make sense for your portfolio. That's likely to be a very small group of investors, however. Most investors will probably want to avoid Altria.
That, however, doesn't make Costco an easy winner here. It certainly seems like the retailer has a more attractive business model. But the dividend yield is a paltry 0.5% and the price-to-earnings ratio is a lofty 55x. That P/E ratio happens to be near the highest levels in the company's history. To sum that up, investors are well aware of how strong a business Costco runs and have priced in a lot of good news. If you care at all about valuation, you'll probably want to avoid Costco right now, too.
Neither Costco nor Altria looks like a great pick right now. However, if you were to put one of these two stocks on your wish list, it should probably be Costco. Unless Altria finds a way to offset the volume declines in cigarettes with new products, it likely has a very bleak long-term outlook.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale. 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.
