MO Money: Why Altria Group Stock is Rallying

Key Points

• Altria is charting a new course to get financially healthy
• Altria will need to lean on its legacy cigarette business for some time
• Altria stock will continue to be moved by Juul-related headlines

Altria Group, Inc. (NYSE: MO)  staged a mini rally last week that was eventually snuffed out by Friday’s market selloff—the fourth straight selloff to new 2022 lows nonetheless.

Still, with the tobacco leader outperforming the S&P 500 by 10% year-to-date, the stock’s defensive nature is at least helping investors limit their losses. A recently increased $0.94 quarterly dividend payout certainly helps in this regard.

More importantly, Altria’s quest to reinvent itself at a time when health & wellness trends are on the rise and smoking on the decline seems to be gaining traction. It certainly needs to. 

According to the Center for Disease Control & Prevention (CDC), approximately 12.5% of U.S. adults smoke cigarettes. While still concerning, it marks a significant decline from 2005 when the smoking rate was estimated to be around 21%. Good news for the overall health of Americans, but not so good news for the tobacco industry. 

With cigarette usage losing steam and alternatives like vaping popular, Altria is charting a new course to get financially healthy. Butt (pun intended) is it working?

What is Altria’s Strategy to Combat the Smoking Decline?

By the end of the decade, Altria’s vision is to lead smokers to “a smoke-free future.” The tobacco industry’s equivalent of shifting from gas-powered to electric vehicles, it is an extremely ambitious mission that has plenty of ground to cover. 

What Altria does have right is that adult tobacco users are seeking different options that lower the risk of disease and death associated with tobacco products. To the company’s credit, it created a smoking cessation program called QuitAssist. But of course it wants to make money, so developing and investing in new products is the main focus.

Building out a portfolio of smoke-free products is the avenue of choice for Altria. Rather than going tobacco-free (and tackling nicotine addiction), it is rolling out an expanding lineup of smokeless tobacco (think: chewing tobacco brands like Skoal), nicotine pouches via the On! brand, and the controversial IQOS heated tobacco. IQOS, the only FDA-authorized heated tobacco system along with its flagship Marlboro HeatStick lineup, has been the subject of much regulatory and health group scrutiny

How Dependent is Altria on Cigarette Sales?

While this strategy plays out, Altria will need to lean on its legacy cigarette business for some time. Currently, sales volumes are down with fewer people turning to smokes compared to the stress-filled pandemic period of 2021. On the plus side, Altria does have pricing power which is allowing it to boost carton prices to help offset the demand shortfall. 

Despite the push into oral tobacco, the company’s Smokeable Products segment still accounts for roughly 90% of revenue. Smokeable revenue managed to inch 2% higher in the second quarter thanks to price hikes as it commanded 48% of retail market share. Ironically, Altria’s growth focus, Oral Tobacco, saw sales decline 4%.

The good news from shareholders’ perspective came a month later when the board announced a 4.4% dividend increase. This kept Altria’s dividend increase streak alive at 12 years and boosted the forward yield to nearly 9%. This has brought new attention to the stock from income investors willing to wait out the long-term growth strategy and collect dividends.

In addition to smokeless tobacco, Altria is getting into the alternative beverage space to diversify away from its Philip Morris cigarette business. It has minority interests in Anheuser-Busch InBev and Cronos Group for the purpose of gaining exposure to the cannabis-infused drink market and related products. 

Why Do Juul Developments Impact Altria Stock?

In the near-term, Altria stock will continue to be moved by Juul-related headlines. That’s because the company holds a 35% stake in the nation’s leading e-cigarette maker. This makes Juul an e-vapor extension of Altria’s smoke-free platform—and one that has been detrimental to its market value due to the mounting risks associated with vaping. 

After non-stop legislative and regulatory setbacks, last week Juul Labs fought back by delivering a challenge of its own. It filed a lawsuit against the FDA regarding the agency’s refusal to share documents that support its order to ban the company. The FDA is targeting Juul Labs for stoking a nationwide teen vaping crisis. 

Its products were banned in June of this year, which caused Altria shares to plummet to a 52-week low. Juul is now after evidence that the FDA’s reasoning had a scientific basis. Last month, Juul was slapped with a $438.5 million settlement related to its marketing and sales practices to teens.

The latest development in the Juul saga shows that Juul and its lead cheerleader Altria are not done putting up a fight. It might be the duo’s biggest push back yet. Whether the legal action comes with a positive ending for Juul Labs and Altria remains to be seen. But following an impressive six-day high volume rally in a down market, investors may be thinking ‘where there’s smoke there’s fire.’