Altria's Nationwide E-Cig Rollout Begins in Q2: Why It Could Be Huge for Shareholders

Altria just announced that it will begin distributing MarkTen nationwide starting in the second quarter. This could put new life in the blue chip dividend stock.

Feb 24, 2014 at 5:15PM

Altria Group (NYSE:MO) is playing catch-up in the e-cigarette market after being the last of the big three tobacco companies to enter the space. However, during a presentation to analysts Wednesday at the Consumer Analyst Group of New York conference, Altria announced that it is finally ready for a nationwide rollout of its MarkTen e-cigarette. At the same conference, Lorillard (NYSE:LO) announced its intentions to expand to the European Union after having already captured a dominant share of the U.S. market.

Meanwhile, Reynolds American (NYSE:RAI) plans to distribute its Vuse e-cigarette nationwide later this year. The scramble to get a foothold in the market is evidence that e-cigarettes are the real deal.

What it means for investors
The e-cigarette market is still in its infancy; Euromonitor estimates worldwide sales to reach $2.5 billion in 2013, just a fraction of Altria's $22 billion in sales of smokable tobacco products. However, Wells Fargo estimates the e-cigarette market could grow to more than $20 billion in the U.S. by 2023. If Altria were to capture a 25% share, it would add another $5 billion in annual revenue at a time when revenue growth is hard to come by.

E-cigarette sales are bound to cannibalize traditional cigarette sales, so entering the market is as much a defensive move as a growth initiative. The Wall Street Journal reports that "e-cigarettes drove total industry cigarette volumes down [by] about 600 million cigarettes, or about 1 percent" during the first quarter of 2013. That estimate excludes Internet sales, which is a popular distribution channel among smaller manufacturers.

Altria's MarkTen e-cigarette has so far been tested in Indiana and Arizona. It captured a 48% share of the Arizona market in just seven weeks -- suggesting that Altria's significant distribution capabilities and product's desirability are strong enough to capture a large share of the nationwide e-cigarette market. Altria's CEO says the company will make small adjustments to the flavor profile, among other minor improvements, before distributing MarkTen nationwide in this year's second quarter.

Altria packs a powerful one-two punch with a discount e-cigarette and a premium e-cigarette. MarkTen is a disposable e-cigarette that operates at the lower end of the market. The starter pack will sell for $9.50; consumers will have to pay extra for refill cartridges. By comparison, Altria's most recent acquisition -- Green Smoke -- sells starter packs for its premium e-cigarettes at prices ranging from $30 to $170, with the most popular pack costing $100. Green Smoke, which likely fetches higher margins than MarkTen, could eventually become Altria's flagship e-cigarette brand.

However, for the time being, Lorillard dominates the market. Blu captured a 47% market share in 2013. Blu and privately owned brands Njoy and Logic capture three-fourths of the retail market for e-cigarettes. However, with Altria's and Reynolds American's vast distribution capabilities, the market may soon be split five ways between the leading e-cigarette brands.

Although competition could spark a destructive price war, there is enough room for growth that competition may be relatively light over the next few years. According to the Centers for Disease Control and Prevention, half of the more than 45 million American cigarette smokers try to quit each year. E-cigarettes are believed to be effective smoking-cessation devices because they mimic the look and feel of a real cigarette but are believed to be less harmful. This may also allow the devices to escape the high taxes and strict regulations that have led to declining traditional cigarette volume.

Even though a rising tide will lift all boats, it is crucial that MarkTen gets into the hands of as many consumers as possible early on if Altria is to dominate the market. Although consumers are still experimenting with different brands, they may eventually become as loyal to one e-cigarette brand as many are to their traditional cigarette brand. Altria knows firsthand how valuable brand loyalty is; Marlboro has a dominant 44% share of the cigarette market and has tremendous pricing power. Altria needs to lock in consumers to MarkTen and Green Smoke before they get hooked on another brand.

Foolish takeaway
Altria is about to enter the fastest-growing market the tobacco industry has seen in decades. Its 48% market-share capture in Arizona is a sign that it could eventually dominate the nationwide market; investors should monitor management's quarterly comments to see if the nationwide introduction goes as smoothly as it did in Arizona. Although traditional cigarette volumes will continue to decline -- and e-cigarettes may accelerate that decline -- Altria's multibillion-dollar revenue opportunity in e-cigarettes could give the stock new life if the company executes.

You need more than tobacco stocks to fill out your dividend portfolio
One of the dirty secrets that few finance professionals will openly admit is the fact that dividend stocks as a group handily outperform their non-dividend paying brethren. The reasons for this are too numerous to list here, but you can rest assured that it's true. However, knowing this is only half the battle. The other half is identifying which dividend stocks in particular are the best. With this in mind, our top analysts put together a free list of nine high-yielding stocks that should be in every income investor's portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.

Ted Cooper has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information