Tobacco company Altria Group (MO 1.90%), has continued thriving, despite decades of falling smoking rates in the U.S. However, nothing lasts forever, and Altria and its competitors are racing to build a future where "reduced-risk products" like oral nicotine pouches and electronic cigarettes make up the majority of their revenue.
Altria owns several popular cigarette brands and has the exclusive license to sell the legendary Marlboro brand of cigarettes in the United States, but the company's future could get complicated after recent developments within the industry. Investors need to pay close attention to Altria's moves over several years. Here is what you need to know.
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Is Philip Morris a friend or foe?
Altria used to be a global company until spinning off its international operations as Philip Morris International (PM 2.40%) in 2008. Philip Morris International (PMI) owns the Marlboro brand (licensing it to Altria) and sells it outside the U.S. The two companies are essentially siblings and have had a good working relationship over the years, even entertaining the idea of merging back together in recent years.
However, PMI recently announced a massive $16 billion cash acquisition of Swedish Match (SWMAF +0.00%), which manufactures Zyn oral nicotine pouches. Swedish Match generates 64% of its revenue in the United States, so this is the first time that PMI will be directly competing with Altria, which sells a competing nicotine pouch brand called On!.
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Altria also has a licensing deal with Philip Morris to sell its IQOS product in the United States. This is a reduced-risk device that heats (but doesn't burn) tobacco to create a less harmful vapor. PMI will soon begin manufacturing IQOS in the U.S., which could eventually set the stage for PMI to break away from its relationship with Altria. Why would PMI need Altria once it penetrates the U.S. market?
What "moving beyond smoking" currently looks like
These potential risks shine a bright light on Altria's long-term product lineup. As of 2021, smokeable products like cigarettes and cigars make up 90% of Altria's total operating profits. The company's adopted the slogan "Moving beyond smoking," but that seems more like future ambition than current reality.
Perhaps the most troubling aspect of Altria's business is its very light portfolio of these reduced-risk products that are supposed to represent the future.
For starters, it doesn't have direct ownership of next-generation smoking devices. It owns a 35% stake in Juul Labs, the embattled electronic cigarette company that Altria paid $12.8 billion for in 2018. It has already written its value down to just $1.6 billion a few years later. Juul has faced an onslaught of lawsuits for marketing to underage users, and it hasn't meaningfully contributed to Altria's overall business to date.
Altria was selling IQOS in the United States before a patent infringement pulled IQOS off the market. But it doesn't own the product -- PMI does, and though the two companies have inked distribution agreements, it could get messy if PMI decides to try to pull away from Altria in the future.
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Lastly, Altria has On! nicotine pouches, but again, it faces direct competition from PMI now that it's buying Swedish Match. On! isn't even the market leader; that title belongs to Zyn, which owns 64% market share in the United States.
For decades, Altria's benefited from its exclusive right to sell top cigarette brand Marlboro in the U.S. But it looks like Altria's portfolio of reduced-risk products is full of indirect ownership and non-leading brands. There's a real chance that Altria's long-term future isn't nearly as glorious as its long-standing history.
Altria's massive Anheuser-Busch stake is critical
The company has one "ace in the hole," its roughly 10% stake in beer titan Anheuser-Busch InBev (BUD +0.67%). The company has a market value of $110 billion today, giving Altria's stake a value of about $11 billion before taxes.
The company could liquidate that stake to either pay down debt or invest in an acquisition or product development that could help bolster its reduced-risk portfolio. It's all speculation, but what Altria does with that asset will be critical to investors.
This isn't to say that Altria's a "bad" stock, or is financially unstable. The company brings in more than $21 billion in annual revenue and turns 39% of that into free cash flow. The company's dividend yield is 6.6%, and the dividend payout ratio is manageable at 78% of cash flow.
Altria's a legendary wealth compounder, turning a $10,000 investment into more than $373 million over its lifetime. But cigarette volumes fall every year. The company's best days could be long gone without a competitive reduced-risk product portfolio to take cigarettes' place in driving growth.
