2019 has been a tough year for Altria (MO -0.13%), with its $12.8 billion investment in Juul Labs looking like it might go up in smoke. Vaping concerns and other challenges have caused Altria to write down $4.5 billion of its bet on the electronic cigarette manufacturer already. It also saw cigarette volumes fall more steeply than the industry, and its leading Marlboro brand, which accounts for most of its volume, lost more market share.
The culmination of these events has been a stock that has lost a quarter of its value over the past year, even as the S&P 500 has gained over 11% and has recently hit new highs.
But it's not all bad news, and income-seeking investors have good reason to maintain their faith in Altria as a great dividend stock.
Keep them coming back for more
Smoking's decline is nothing new. The U.S. Centers for Disease Control and Prevention says that in 1965, more than 42% of the American public smoked cigarettes, a figure that has fallen to less than 17% today. Other companies would have been ruined by their business evaporating like that, yet Altria has not only survived but thrived because of its enormous pricing power.
Tobacco companies can raise prices almost at will, a fact fully on display earlier this year when Altria raised the price of its cigarettes for the third time in 2019. That's helped keep tobacco a very profitable business for Altria, as its adjusted earnings rose over 10% from the year-ago period.
Lost in a fog
Yet because cigarette smoking is on the wane, Altria has sought out other opportunities, namely the e-cig market, which had seemingly exponential growth potential. With the goal of offering a safer alternative to cigarettes, it gave tobacco companies an avenue to participate in future expansion.
Most notable was Altria's investment in Juul, which is by far the leading e-cig maker with upward of 75% market share. Unfortunately, it was also a favorite among teenagers. The Food and Drug Administration has subsequently cracked down on e-cigs and the company as a result of teen use, and there are questions whether Juul will be able to make it through the regulatory process. That's part of the reason Altria wrote down billions off its investment in the company, and it is no coincidence that Altria executives were installed to run Juul after ousting its CEO.
More than just Juul
Luckily, Altria has a Plan B. Several years ago, it struck a joint marketing and sales agreement with Philip Morris International (PM 0.09%) in which the two would invest in cigarette alternatives. Under the agreement, Altria would have U.S. marketing rights to any technology that resulted.
The IQOS heated tobacco device is the biggest selling e-cig internationally, and though it took over two years to gain approval from the FDA to sell it here, Altria has begun rolling out the IQOS in the U.S. under its Marlboro brand. With no other e-cig maker having successfully navigated the regulatory labyrinth yet -- British American Tobacco only just submitted its application for approval -- the IQOS could dominate the market.
Altria has also invested in nicotine pouches, the fastest growing segment of the tobacco industry, and recently purchased the international business of Burger Sohne for its on! brand of tobacco-free nicotine pouches.
A great dividend stock
All of these products position Altria to continue growing -- and rewarding shareholders -- for the foreseeable future. In August, it raised its dividend for the 50th consecutive year, and the payout currently yields 7.3% annually, making it quite lucrative, yet safe, as a divided investment.
Altria certainly has a few headwinds to confront, but on the whole it remains a great dividend stock for incoming-loving investors to buy and hold.