Altria (NYSE:MO) entered the spotlight in August 2023 when it announced its ambition to rebuild its alternative tobacco segment following the Juul debacle. This endeavor was bolstered by its recent acquisition of NJOY, which we previously discussed in detail.
We held a cautiously optimistic view of the stock back then, citing its strong profitability and attractive dividends. However, we advised investors to closely monitor its progress in the Smokeable Product segment, given the persistent decline in sales volume.
Despite the headwinds facing the conventional tobacco investment thesis, we remain bullish on Altria’s dividend prospects, thanks to the growing demand for Vapour Pods and Heated Tobacco Sticks worldwide.
While Altria has been slower in the alternative tobacco market compared to its rivals, we believe that the acquisition of NJOY will help accelerate its sales and market share gains by H1’24.
The Conventional Tobacco Investment Thesis Continues To Deteriorate
MO Valuations
Altria’s forward valuations have moderated due to recent sell-offs, now aligning closer to its five-year average and sector medians.
Although management has narrowed its FY2023 adjusted EPS guidance by a minimal amount, we believe the correction has been excessive. The new guidance still reflects a 2.2% YoY growth, and we remain unconcerned.
However, concerns regarding the decline in Smokeable Product volumes persist. In the latest quarter, volumes dropped by 6% QoQ and 11.3% YoY, with Marlboro products seeing a similar decline of 5.7% QoQ and 10.5% YoY.
The Smokeable Product segment contributes significantly to Altria’s top and bottom lines, making market sentiment increasingly negative. Price hikes have failed to offset lower shipment volumes, impacting financial performance.
MO’s Dividend Investment Thesis Remains Robust
Despite the challenges, Altria’s dividends remain safe. The company’s net cash flow provided by operating activities has increased by 7.6% YoY, supporting its quarterly dividend payout of approximately $1.6B.
Altria’s TTM Free Cash Flow Yield to Dividend Yield Ratio has moderately improved to 1.41%, surpassing its five-year average of 1.29%. The company has also been deleveraging its balance sheet and maintains a favorable interest coverage ratio.
With a debt to EBITDA ratio of 2.1x, Altria is well-positioned to navigate the uncertain macroeconomic outlook while continuing to grow its dividend at an estimated forward rate of 4.21%.
MO’s Future Lies In The Alternative Tobacco Market
The growing demand for e-cigarettes is evident, with US sales increasing by 47% between January 2020 and December 2022, as reported by the CDC. Other tobacco companies, such as Philip Morris and British American Tobacco, have also experienced significant growth in smoke-free and alternative products.
While Altria’s progress in the alternative tobacco market has been delayed by the Juul fiasco, the acquisition of NJOY presents a new opportunity. With NJOY’s ACE pods gaining traction and expanding retail partnerships, Altria is poised to benefit from this evolving market.
Although NJOY’s market share remains stable at 2.5%, it is still early in the integration process. As Altria completes its transformation plan by the end of 2023, we expect NJOY’s sales and market reach to increase significantly.
So, Is MO Stock A Buy, Sell, Or Hold?
Altria’s stock price has experienced a significant decline lately and is currently testing critical support levels. While a further retracement is a possibility, long-term investors may consider this dip as an opportunity to acquire shares at a lower price.
Furthermore, Altria’s expanded forward dividend yield of 9.97% compared to its five-year average of 7.62% and the sector median of 2.88% is attractive to income-oriented investors with higher risk tolerance.
It is important to note that Altria, like most tobacco stocks, is suitable for investors seeking a consistent dividend payout. Despite the declining conventional tobacco sales, the transition to alternative tobacco products offers long-term prospects.
In conclusion, Altria’s focus on the evolving alternative tobacco market and its commitment to dividends make it an intriguing investment option for those willing to embrace the changing landscape of the industry.
