Income-oriented investors are generally attracted to Altria Group (NYSE: MO) due to its high yield of 8.6% and its long history of increasing the dividend annually since 2009. However, achieving sales growth has proven difficult for the company, with sales declining in each of the past two years and in the first quarter of this year.
That could change, however, with Altria’s NJOY business set to deliver more growth following a recent positive announcement from the U.S. Food and Drug Administration (FDA).
Potential NJOY drove growth
Although the FDA is more known for its tough stance on tobacco products, especially all flavored products, Altria recently received some good news when the government agency approved the sale of four menthol e-cigarettes from NJOY. Two of the products – NJOY’s Ace Pod Menthol 2.4% and Ace Pod Menthol 5% – are refillable pod products that work with the Ace vape device. In addition, two disposable e-cigarette products were also permitted, the NJOY daily menthol 4.5% and NJOY daily extra menthol 6%.
Altria acquired NJOY last year for $2.75 billion in cash plus the possibility of $500 million in additional payments if certain products received FDA authorization. As a result of this decision, Altria will pay NJOY’s previous owners an additional $250 million, with the final $250 million payment contingent on the authorization of Blueberry and Watermelon pods that work with its Ace 2.0 device. Given the criticism of flavors that attract teenagers, authorization for these products seems less likely.
However, now that NJOY has the only FDA-approved flavored vape products on the market, it’s in a solid position to grow its market share in the U.S. At the end of the first quarter, it only had a 4.3% market share for consumables and 11.5% for devices, so there’s plenty of room to grow.
Additionally, Altria is looking to expand the brand’s distribution and recently launched its first retail trade program to give NJOY products more visibility with retailers. Distribution was increased to 80,000 points of sale by the end of Q1 and the company plans to increase that to 100,000 points of sale by the end of the year.
The only problem Altria has run into with regards to NJOY is that illegal Chinese-flavored vape products like Elf Bar’s continue to gain market share in the US despite being illegal products. These products often enter the country labeled other items to circumvent U.S. regulations and find their way into vape shops where they are sold illegally. Altria has sued manufacturers, wholesalers and retailers in an effort to slow sales of the illegal products.
However, right now, Altria has the only legal flavored vaping products on the U.S. market. And while that flavor is menthol, it should stimulate growth.
Is it time to buy Altria?
NJOY gives Altria a chance to return to some top-line growth, but even with slightly declining sales, the company is still generating a huge amount of cash flow. Last year, the company generated $9.3 billion in operating cash flow and $9.1 billion in free cash flow, which excludes capital expenditures (capex). That gave the company a strong dividend coverage ratio of 1.3 times its free cash flow, demonstrating a high level of safety for the dividend and the ability to continue increasing it in the years ahead.
Meanwhile, the stock trades at a forward price-to-earnings (P/E) ratio of around 9 times, which is a very reasonable valuation. If NJOY is able to spark some growth, that multiple could be higher.
Given NJOY’s attractive yield, well-covered dividend, cheap valuation, and potential to generate some revenue growth, Altria appears to be a solid option for investors looking for a nice stream of dividend income that is expected to continue growing in the coming years.
Should You Invest $1,000 in Altria Group Now?
Before you buy Altria Group stock, you should consider the following:
The Motley Fool Stock Advisor analyst team just identified what they think is the 10 best stocks for investors to buy now… and Altria Group wasn’t one of them. The 10 stocks that made the cut could deliver monster returns in the years to come.
Think about when Nvidia made this list on April 15, 2005… if you had invested $1,000 at the time of our recommendation, you would have $757,001!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates and two new stock picks per month. The Stock advisor is on duty more than quadrupled the return of the S&P 500 since 2002*.
View the 10 stocks »
*Stock Advisor returns as of June 24, 2024
Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Can NJOY help propel Altria Group stock higher? was originally published by The Motley Fool
