Altria Group, Inc. (MO Quick QuoteMO - Free Report) has been experiencing gains from its efforts to solidify its position in the smoke-free product market in the face of declining cigarette volumes. The company’s shares have rallied 15.4% in the past three months. Although underperforming the industry’s growth of 19.3%, Altria has fared better than the broader Zacks Consumer Staples sector and the S&P 500’s respective gains of 5% and 5.6% in the same time frame.

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Altria closed the trading session at $53.36 on Thursday, just shy of its recently achieved 52-week high of $53.53. The stock is trading above both its 50-day and 200-day moving averages. Trading above these averages signals bullish sentiments.

Altria’s Winning Strategies

With consumers increasingly shifting toward reduced-risk products due to health concerns associated with smoking, Altria is seizing the opportunity to solidify its position in this evolving market with its smoke-free products. 

Altria is actively leading the transition toward a smoke-free future with its innovative product offerings. In the second quarter of 2024, the company’s smoke-free products, including the NJOY e-vapor line, delivered strong share and volume performance. NJOY, in particular, has shown promising growth, with significant increases in both consumables and device shipment volumes. This momentum suggests that MO is well-positioned to capture a growing market of adult smokers seeking alternatives to traditional tobacco products.

Altria has successfully expanded NJOY's retail footprint, tripling its presence to more than 100,000 stores. The company’s efforts in securing premium retail positioning and launching a variety of trial-generating activities have resulted in significant share growth for NJOY products. The introduction of new products like on! PLUS in international markets shows Altria’s capability to innovate and capture market share in the rapidly growing nicotine pouch segment.

The success of on! has been another key driver in Altria's smoke-free product portfolio, particularly in the U.S. market, where oral tobacco-derived nicotine (TDN) products are gaining popularity as lower-risk alternatives. In the second quarter of 2024, the Oral Tobacco Products segment reported a 4.6% revenue increase to $711 million, with on! shipment volumes surging by 37% year over year. Industry giant Philip Morris International (PM Quick QuotePM - Free Report) is also expanding its footprint in the smoke-free sector with popular products like IQOS and ZYN.

Altria’s traditional cigarette business continues to benefit from the enduring strength of its flagship brand, Marlboro, which remains a dominant force in the premium cigarette market. Despite facing headwinds, Marlboro held a commanding 42% share of the U.S. retail market in the second quarter. The brand’s strong consumer loyalty and aspirational appeal contribute to its sustained demand, reinforcing Altria's market leadership.

The company’s robust pricing strategy has enabled the company to maintain profitability even as cigarette shipment volumes decline. While higher prices might lead to reduced consumption, the addictive nature of cigarettes often results in consumers absorbing these increases, ensuring continued revenue generation for the company.

Altria’s Reign as a Dividend Giant

Altria’s strong cash flow from its core operations enables it to invest in innovative product development while simultaneously returning value to shareholders.  During the first half of 2024, the company returned more than $5.8 billion to shareholders through dividends and share buybacks. Dividends paid amounted to $1.7 billion in the second quarter and $3.4 billion in the first half. 

With a current dividend yield of 7.3%, Altria remains an appealing option for income-focused investors looking for consistent and significant payouts. However, the company's payout ratio, nearing 80%, raises concerns about the sustainability of these dividends in light of the ongoing challenges Altria faces.

MO's Pressing Concerns

While Altria is expanding into new areas such as e-vapor and oral tobacco, cigarettes remain its main revenue source. The company continues to derive its major revenue chunk from the Smokeable Products segment, which has been struggling for a while. 

The cigarette industry faced significant headwinds during the second quarter and the first half of the year, with shipment volumes under continued pressure. This decline is attributed to ongoing macroeconomic challenges and the rapid growth of illegal disposable e-vapor products. 

Despite a recent stabilization in the inflation rate, adult smokers continue to experience economic strain due to the prolonged effects of inflation and constrained discretionary spending. The elevated growth of illicit e-vapor products, exacerbated by inadequate enforcement, has led to a higher-than-expected cross-category movement from cigarettes to these illegal alternatives. Altria has been witnessing a decline in its Smokeable Product segment revenues for the past few quarters now, which has been hurting the company’s overall top line.

In the second quarter of 2024, Altria’s Smokeable Products segment revenues declined 5.6% to $5,495 million, which accounted for 88.5% of the company’s total revenues. Domestic cigarette shipment volumes tumbled 13%, mainly due to the industry’s decline rate, retail share losses and trade inventory movements. The industry’s decline was a result of macroeconomic pressure on Adult Tobacco Consumers’ (“ATC”) discretionary income and increases in illegitimate e-vapor products.  

The decline in cigarette volumes remains a critical issue for Altria. If the company fails to offset these declines with substantial growth in new smoke-free categories, it could face prolonged revenue contraction, adversely affecting its financial performance and stock valuation.

Altria also encounters substantial regulatory and legislative risks that could affect its operations and financial results. Potential regulatory actions, such as flavor bans or tighter marketing restrictions, could hinder the growth of NJOY and other smoke-free products. 

Has the Recent Jump in Stock Price Made MO Expensive?

Altria's current market valuation is stretched compared to its industry peers like British American Tobacco p.l.c. (BTI Quick QuoteBTI - Free Report) and Japan Tobacco Inc. (JAPAY Quick QuoteJAPAY - Free Report) . Altria's forward 12-month price-to-sales (P/S) ratio is 4.45, surpassing the industry average of 3.33. This higher ratio implies that investors are potentially paying a premium for Altria's stock relative to its anticipated sales performance. Furthermore, Altria's Value Score of C adds to the concern, highlighting that the stock might be overvalued based on its current financial metrics.

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Analyst Projections for Altria: A Closer Look

While the Zacks Consensus Estimate for 2024 earnings per share (EPS) has dipped by a penny to $5.10 over the past 30 days, the consensus mark for 2025 EPS has increased by 2 cents to $5.30 in the same time frame. However, these projections suggest year-over-year growth of roughly 3% and 4%, respectively. Despite industry-wide challenges, analysts still expect modest earnings growth.

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Investor Playbook for Altria’s Stock

Altria holds a robust position in the U.S. tobacco industry, bolstered by its attractive dividend yield and expansion into smoke-free alternatives. However, the company's declining cigarette sales and exposure to regulatory uncertainties require a cautious approach. Investors need to evaluate these aspects thoroughly, balancing the promising income prospects with the existing challenges. Current shareholders might find it prudent to retain their investments, whereas those looking to enter should consider waiting for a more favorable opportunity to buy. MO currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.