The Food and Drug Administration recently announced a ban, blocking electronic cigarette maker Juul Labs from selling its products in the United States.
The decision could mark a painful end to the disastrous saga for Altria Group (MO 0.49%), which bought a 35% stake in Juul for $12.8 billion in late 2018.
Altria's stock responded to the move by dropping near its 52-week low, but the ban of Juul isn't necessarily the blow to Altria the market is acting like it is. Here's why the company should be just fine and why the dip could be a buying opportunity for dividend investors.
The damage is already done
The news sounds terrible on the surface: Altria acquired a significant stake in Juul intending to build on its electronic cigarettes as a critical piece of the tobacco giant's long-term future. The FDA's intention to block Juul in the United States makes the stake almost useless to Altria, essentially closing the book on a multibillion-dollar disaster.
For many, the ban was a surprise after rival British American Tobacco's Vuse had received the FDA's clearance. Even then, Altria has been significantly writing down the value of the Juul investment on its books in the past few years.
Altria currently values Juul using the fair value method, evaluating the holding each quarter and noting its value and any cash dividends in Altria's earnings statement. Since acquiring the stake in 2018, Juul came under scrutiny on various occasions for allegations it marketed to minors and faced more than 2,000 lawsuits that forced Altria to recognize huge non-cash losses by writing the value of its Juul stake down from $12.8 billion to just $1.7 billion.
The company could write off the last $1.7 billion, or a portion of it, but investors should know most of the damage has already been done. If anything, this latest news from the FDA may seal Juul's fate and tell investors Altria is unlikely to recover much value from its 35% stake over the long term.
Altria gains flexibility from Juul's failure
Juul's demise does come with a silver lining. The Juul investment included terms that prevented Altria from marketing a competing device. In other words, they were married to each other. These terms were effective until the end of 2024.
But the FDA ruling would effectively divorce the two. Altria notes in its 2021 annual report:
If, however, JUUL is prohibited by federal law from selling e-vapor products in the United States for at least one year or if Altria's carrying value of the JUUL investment is not more than 10% of its initial carrying value of $12.8 billion, we may elect to compete with JUUL in the e-vapor category prior to December 20, 2024.
Investors will now have to wait and see how Altria responds the situation as it aims to fill the hole left by Juul's ban. Still, the company at least has the flexibility now to pursue a new long-term path while its legacy tobacco profits still provide plenty of cash to fund new initiatives.
The tobacco business remains strong
Perhaps the most important takeaway for investors is that Altria's existing business is strong. Yes, the company is trying to plan for when there are no longer enough cigarette users to sustain its business, but that's not a short-term problem. You can see below how free cash flow has steadily climbed over the past decade.
Data by YCharts.
The stock's 78% dividend-payout ratio means Altria's juicy 8.3% dividend is safe. And as far as investments go, the company still owns 10% of Anheuser-Busch InBev, a stake that's worth roughly $9 billion today and a financial safety net for the company.
Now that Altria may be facing the end of the road for its Juul investment, it can stop wasting time and pursue other options while the business is still profitable enough to generate the cash needed to invest in new products and ideas.
Otherwise, Altria remains a dividend-paying machine, which doesn't change whether or not Juul permanently folds in the United States. The stock's recent decline is a buying opportunity worth considering if you're looking to maximize your dividend income.
