Altria (MO 1.91%), the maker of Marlboro cigarettes, is the largest tobacco company in the United States. Most investors likely recognize it as a blue chip stock, which is owned for stability and income. But as a long-term investment, Altria's future is murky because domestic smoking rates have declined over the past several decades. It repeatedly raised its prices, cut costs, and bought back its shares to offset that slowdown, but those strategies could be unsustainable.
I believe Atria is a decent safe-haven play for this ongoing bear market, but it could lose its luster once a new bull market starts. Today, I'll discuss three lesser-known aspects of Altria's business -- and how they might impact its future.
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1. Altria shrank and evolved over the past two decades
Altria was known as the Philip Morris Companies until its rebranding in 2003. The company was a component of the Dow Industrial Average from 1985 through 2008 when two major spinoffs caused it to drop out of the benchmark index.
In 2007, Altria spun off Kraft Foods, which eventually restructured its snack foods business as Mondelez International and merged its namesake grocery business with Heinz to create Kraft Heinz. In 2008, Altria spun off its international tobacco business as Philip Morris International. That spinoff enabled PMI to expand more rapidly in higher-growth overseas markets while being shielded from litigation against Altria's domestic business.
The slimmed-down Altria expanded its portfolio beyond cigarettes. It acquired UST, a maker of chewing tobacco, snuff, and wine, in 2009. It also expanded into the cannabis and e-cigarette markets, respectively, by investing in Cronos Group and Juul Labs in 2018. Altria divested UST's wine business in 2021, but it still owns a large stake in the brewing giant AB InBev. All those moves suggest that Altria will continue to evolve and expand as domestic smoking rates decline.
2. Altria's market share is shrinking
Altria generates most of its revenue from its Marlboro cigarettes, but that flagship brand's retail share shrank from 43.7% at the end of 2016 to 42.6% in the first nine months of 2022. During that same period, Altria's entire share of the domestic cigarette market (including its smaller brands) fell from 51.1% to 48.1%.
Those declines wouldn't be worrisome if the cigarette market were still expanding. However, the entire market has been shrinking as smaller competitors like British American Tobacco's Reynolds American chip away at Altria's market dominance. Between 2016 and 2021, Altria's annual cigarette shipments (as measured in total sticks) declined from 122.9 billion to 93.8 million. Therefore, it's only a matter of time before its price hikes fail to offset those declining shipments.
3. Altria is rebooting its alternative smoking businesses
Altria initially expanded into the e-cigarette market with its own MarkTen and Green Smoke brands. But in late 2018, it discontinued both brands and bought a 35% stake in Juul, the leader of the domestic market, for $12.8 billion instead. However, Altria's stake in Juul shriveled after the Food and Drug Administration (FDA) banned Juul's products last year.
That stunning setback forced Altria to partner with its overseas counterpart PMI to sell the latter's popular iQOS heated tobacco products (which heat up tobacco sticks instead of burning them) to U.S. consumers. However, that deal expires this April and won't be renewed. Last October, Altria struck another similar deal with Japan Tobacco to sell its Ploom heated tobacco sticks in the U.S., but the FDA isn't expected to approve those products until 2025.
As for e-cigarettes, Altria ended its non-compete deal with Juul last September and is reportedly developing a new first-party vaping device. But it's still unclear when it will actually launch that product -- and if it will suffer the same fate as MarkTen and Green Smoke in the crowded and fragmented market.
Altria's business is still stuck in a rut
Over the past five years, Altria's stock declined 35%. Even after factoring in its reinvested dividends, it delivered a negative total return of 7%. The S&P 500 generated a total return of nearly 60% during the same period. Altria's stock slumped because its core business was shrinking, and it was struggling to expand into new markets. The company might continue to evolve and launch new products, but those 11th-hour strategies probably won't rejuvenate its aging business.
