Can Altria Stock Maintain Dividend on Tobacco Alternatives?
There truly is a day for everything. May 31 is World No Tobacco Day, a global campaign to reduce smoking.
Many smokers who want to quit may use transition products, such as nicotine vapes, patches and gum. These non-smoke products can be used to taper off nicotine, which is the addictive chemical found in tobacco.
Several years ago, Altria Group Inc. (NYSE: MO) announced its desire to be the leading producer of “reduced risk” tobacco products. As part of that ongoing initiative, the Virginia-based company recently submitted premarket tobacco applications (PMTAs) for the on! brand oral nicotine pouches.
As cigarette smoking continues to fall out of favor, Altria is counting on the success of alternative products such as nicotine pouches, heated tobacco and e-cigarettes. The company also has investments in legal marijuana.
Altria stock is down 23.3% year to date. That’s worse than the S&P 500, which is down 7.4% for the same period. But investors looking for a tobacco stock may like Altria’s diversified approach. And its consistent dividend is very attractive.
What Are PMTAs?
The Food and Drug Administration (FDA) is requiring any tobacco or nicotine product introduced to the market after 2007 to go through a review process. This includes e-cigarettes and tobacco alternatives. The deadline for submitting these PMTAs was originally this month, but was moved to September due to the coronavirus.
Altria submitted 35 PMTAs for the on! oral nicotine pouches, according to Convenience Store News. “On! nicotine pouches are a key part of our vision to responsibly lead the transition of adult smokers to a non-combustible future,” said Paige Magness, an Altria senior vice president. “We believe the supporting science is strong and are committed to working with the Agency on these important product submissions.”
The on! pouches come in seven flavors and five different nicotine levels. It’s “a broad portfolio of nicotine pouches to consumers seeking an alternative to traditional tobacco products,” according to Tobacco Business.
Altria entered this space last year when it acquired 80% of certain companies in the Burger Söhne Holding group of Switzerland. Altria formed a subsidiary, Helix Innovations, to house the on! brand.
When the deal was announced last year, Altria CEO Howard Willard said, “This acquisition will add another non-combustible product to our portfolio in what we believe is a high-potential, rapidly developing oral (tobacco-derived nicotine) products category.” Willard has since retired.
Tobacco-derived nicotine sales hit $60 million in the U.S. in 2018, representing 250% growth over the previous year, according to Altria. The company estimates that 20 million American smokers are interested in trying “reduced harm” nicotine products.
“Ultimately, we believe the category could reach approximately $3 billion in U.S. sales,” Vivian Azer, analyst at Cowen and Co., told Convenience Store News. That would represent 3% of the $76 billion U.S. cigarette market.
In an earnings call last month, Altria CEO Billy Gifford said on! pouches were available in 28,000 stores. The only danger now is if the FDA declines to approve the PMTAs. If that happened, the company would have to pull the product from store shelves.
Altria’s Other Plays
Besides the on! pouches, Altria holds equity investments in Juul Labs Inc. (e-cigarettes), AnheuserBusch InBev (alcohol), and Cronos Group (marijuana). So far, these investments have been a mixed bag.
On paper, Juul’s e-cigarettes seem like a perfect play for Altria. But privately held Juul recently cut a third of its staff and reduced operations in Europe and Asia. Altria took two writedowns totalling $8.6 billion on its investment.
With respect to legal marijuana, Altria invested $1.8 billion in Canadian pot grower Cronos in 2018, taking a 45% stake. Some analysts say Altria overpaid for Cronos, which has a market cap of $2.05 billion. Cronos stock is down 13.17% year to date.
Altria’s smokeless tobacco product has run into its own problems. The United States International Trade Commission (USITC) is investigating a legal dispute over Philip Morris International’s iQOS heated tobacco device. Altria is selling those products under a deal with Philip Morris International (NYSE: PM).