Altria Group, Inc. (MO): A Smoky Future in a Vaping World

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Introduction:
Altria Group, Inc. (MO) has long been associated with the tobacco industry, but as the world evolves, so do the challenges it faces. While the company's stock may have recently fallen due to a miss in earnings, it's important to look beyond the immediate financial performance. MO's future may not be as bright as its historical legacy, and here's why.
Demographic Trends Working Against Altria:
For years, Altria has been able to maintain its revenue by continuously increasing cigarette prices. However, it's becoming increasingly clear that demographic trends are working against the tobacco giant. A recent Gallup poll revealed that only 12% of U.S. adults smoked cigarettes in the past week, a historic low in the 80-year trend. Young adults are also less likely to smoke, opting for alternatives like vaping or marijuana.
As the older generation of smokers inevitably decreases, there's no new wave of customers to take their place. This could lead to a decline in revenue, as reflected in Altria's recent financial performance. In Q3 2023, the company's revenue was $5.3 billion, a 2.5% decline from the previous year, primarily driven by lower shipment volumes and higher promotional investments in the Smokeable products segment.
Hope in E-Cigarettes:
To secure its future, Altria has ventured into the e-cigarette business. Vaping remains popular among young adults and continues to grow. Altria has shifted its vaping strategy by acquiring its own e-cigarette brand, NJOY, and ending its minority stake in JUUL. Currently, NJOY holds a 2.5% market share, and Altria aims to leverage its logistics, supply chain, and marketing prowess to catch up. NJOY's premium product, ACE, is expected to be distributed in 70,000 stores by year-end.
Altria is also taking legal action against other brands to remove smaller players from the market, enabling NJOY and Altria to capture a larger market share. However, despite these efforts, it's unlikely that Altria will dominate the vaping market as it does the traditional cigarette market.
Yield vs. Bonds:
The sharp rise in interest rates has made investing in Altria less attractive. The spread between the yields on Altria stock and 10-year U.S. Treasury bonds has narrowed significantly. While Altria's TTM dividend yield was between 6.5% to 8.3% from 2020 to 2021, it has dropped to 9.67% in comparison to the 4.84% yield of the 10-year Treasury bond. This suggests that Altria stock, despite its recent price drop, is still relatively expensive.
Conclusion:
Altria's future growth prospects are uncertain, and its stock price may not accurately reflect the risks associated with the changing market. Investors who have traditionally been attracted to MO stock for its dividend yields should be cautious. The narrowing spread between Altria's dividend yield and treasury bond yields suggests room for MO stock to fall further, possibly to around $30 to $31.

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