Altria Group (NYSE:MO) has given its long-term shareholders strong returns, but it hasn't always been easy for investors to hold onto their resolve. The tobacco giant has faced numerous obstacles over its long history, including litigation, consumer advocacy attacks, regulatory restrictions, and a general downtrend in smoking over the past several decades. Yet despite all those obstacles, Altria has always managed to produce impressive growth in earnings. Still, the potential transformation in the tobacco industry seems to pose a much different threat, and uncertainty about whether Altria can successfully make a transition toward less of an emphasis on cigarettes has held the stock back in recent months.

Coming into Thursday's first-quarter financial report, Altria investors had their usual expectations for solid earnings performance despite top-line sluggishness. Altria's results on their face had a lot of encouraging signs, but that still didn't fully satisfy shareholders who had perhaps hoped for more definitive details about how the tobacco giant expects to sustain growth in the years to come.

Outdoor sign with Altria name and corporate logo.

Image source: Altria Group.

Altria starts 2018 strong

Altria's first-quarter results were consistent with what investors have seen recently from the company. Revenue net of excise taxes was higher by 1.8% to $4.67 billion. Net income jumped 35% to $1.89 billion, and after making allowances for extraordinary items, adjusted earnings of $0.95 per share climbed 30% from year-ago levels and was higher than the consensus forecast among investors for $0.93 per share.

Looking more closely at Altria's divisions, the smokeable products unit continued to see challenges in producing growth. Revenue net of excise tax was up just 0.4%, as higher pricing was able to offset reduced volume and higher investments in promotional activity. Yet the 4.2% drop in cigarette shipment volume played a key role in pulling down adjusted operating company income by 2% from year-ago levels. The result was a half-point drop in Marlboro's total retail market share to 43.2%, and that pulled down Altria's overall market share to 50.3%, down from 51% in the first quarter of 2017.

By contrast, the non-cigarette side of the tobacco business was strong. Smokeless tobacco revenue jumped 13% net of excise tax, producing a staggering 27% jump in adjusted operating company income. The comparison against last year's period was favorable, given the recall of certain smokeless products in early 2017. The unit was able to boost its market share slightly, based largely on strength in the Copenhagen brand.

Altria's wine unit had mixed performance. Revenue climbed 0.7% net of tax, but operating company income fell by nearly a fifth. Rising shipment volume helped lift the business, but one-time employee bonuses were costly to the unit's bottom line.

Finally, the tobacco giant's holdings in beer behemoth Anheuser-Busch InBev contributed positively to performance. Earnings from the roughly 10% equity investment stake amounted to $342 million, and although that doesn't get included in earnings attributable to Altria, it's still money that flows into its coffers.

What's ahead for Altria?

CEO Marty Barrington didn't have much to say about the tobacco company's gains. "Altria is off to a fast start to the strong year of EPS growth to which we've guided," Barrington said, pointing to the 30% bottom-line growth in the quarter. The CEO also noted the 6% dividend increase earlier this year, which he referred to as being "out-of-cycle" in reflecting the positive benefits of tax reform immediately rather than waiting until its usual late-summer time frame to increase its payout.

Altria repeated its previous guidance for the full year. The company still expects 15% to 19% growth in adjusted earnings per share, taking full advantage of lower tax rates to add to its typical high-single-digit percentage growth target for the bottom line.

The bigger concern that many investors have is about the growth in the e-vapor category and its competitive threat to cigarettes. Barrington expressed his belief in the conference call following the report that as technology improves, demand for vapor-based products should rise. That makes it essential for Altria to follow a strategy that encourages innovation in areas like e-vapor while still preserving the success of the Marlboro brand. Yet Altria wasn't able to offer any details on its joint efforts with Philip Morris International to gain FDA approval for the iQOS heated tobacco system for sale in U.S. markets, and that seemed to disappoint some investors despite Altria's portfolio approach toward alternative products.

Altria shareholders saw their uncertainty affect the stock price, as shares fell 2% on Thursday following the announcement. The tobacco giant has been able to overcome obstacles like this in the past, but even long-term investors see the current challenge as being fundamentally different and requiring a more aggressive approach in order to assure continued success for Altria.