Consumer Products

Why Juul's European Departure Helps Altria Stock

Altria (NYSE: MO) has been playing defense for a long time now. COVID-19 has already beaten up the company but things may be getting even worse as Juul Labs Inc., in which it has a stake, is facing fresh problems. However, this very well could be a net positive.

The e-cigarette firm looks to be facing down a departure in a few European countries, and this comes after a long and bumpy road.

Juul’s Journey So Far

In 2018 Altria invested $12.8 billion for its 35% stake in Juul. For those late to the party, Juul is known for producing vaping products, an alternative to smoking. However, there have been big problems with this investment.

Juul has seen increased scrutiny as more and more people begin to realize that e-cigarettes may be just as bad as the real thing. Even worse, this company has faced accusations that it has marketed products to underage kids.

According to the Centers for Disease Control and Prevention (CDC), electronic cigarette use has surpassed conventional cigarette use among high schoolers. Some 11.7% of those students are using e-cigs, compared with 7.6% using regular cigarettes.

This came to a head when the U.S. Food and Drug Administration (FDA) raided Juul’s headquarters in San Francisco. The FDA seized documents that it believed would identify the real health risks associated with vaping, as well as “sales and marketing practices.”

As a result, Altria had to take a $4.5 billion write-down for its investment in Juul.

It’s worth pointing out here that Juul isn’t the only investment that has underperformed for Altria. Cronos Group Inc. (NASDAQ: CRON) is another company that Altria has pursued. In this case, Altria invested $1.8 billion in Cronos stock for a stake of about 45% in 2018. Note that Cronos currently has a market capitalization of $1.9 billion.

Long Road Ahead

But it looks like things are only getting worse from here as last week Juul said that it’s cutting about a third of its 3,000-person workforce and moving its headquarters from San Francisco to Washington, D.C. In conjunction with this, the e-cig maker is reportedly exiting five European markets.

Juul is reportedly planning on pulling out of Austria, Belgium, Portugal and Spain in July, followed by France at the end of the year, according to BuzzFeed News.

After Juul pulls out of these countries, its footprint will be limited to Ireland, Italy, Czechia, Germany, Poland, Switzerland, Ukraine, Russia and the United Kingdom. Note that Russia and the United Kingdom are two of the largest markets in the world.

There are a few reasons for Juul’s departure from these markets. Ultimately, the markets in Austria, Belgium and Portugal are too small to justify a presence. At the same time, Juul has relatively strong sales in France and Spain, compared to the rest of Europe. However, the costs of running the business and dealing with regulators is apparently too much.

It’s no secret that the European Union has strict requirements when it comes to e-cigarettes. For example, regulators require companies to stick to a nicotine limit of 20 milligrams per milliliter of fluid, but a single Juul pod can contain up to 59 milligrams of nicotine per milliliter in the U.S.

Earnings

Altria reported its most recent quarterly earnings at the tail-end of April. Although the initial response to earnings was very positive, Altria stock has lagged since then.

As for the results, Altria posted $1.09 in earnings per share (EPS) on $6.36 billion in revenue. Analysts were calling for $0.97 in EPS and $4.62 billion. The first quarter from last year had $0.92 in EPS and $5.63 billion in revenue.

In this report, the tobacco giant also announced that it reopened the Richmond Manufacturing Center under enhanced safety protocols. Altria was sure to note that all of its manufacturing facilities are currently operational.

Billy Gifford, Altria’s CEO, addressed perhaps the most important part of the report:

Our dividend is important to our investors and it remains a top priority for us. Our objective continues to be a dividend payout ratio target of approximately 80% of adjusted diluted EPS. For 2020, we expect to recommend a quarterly dividend rate to our Board that reflects, among other things, our strong cash generation and the strength of our balance sheet.