Altria’s Business Shifts Amid Market Changes

Despite a decline in its main market, Altria is adapting its business model. The company is focusing on expanding its smoke-free product line and actively cutting costs.

With a low valuation and high dividend yield, Altria presents a solid defensive option in a shaky market. This year, the S&P 500 has risen about 16%, nearing record highs. Although currently priced at 31 times earnings—which could be seen as steep—various short-term challenges such as ongoing inflation, increasing Treasury yields, geopolitical tensions, and uncertain policy shifts could pressure these valuations.

Leading the S&P 500’s growth are several high-tech giants, often referred to as the “Magnificent Seven,” which feature companies like Nvidia, Apple, Microsoft, Amazon, Alphabet, Meta, and Tesla. These firms comprise a significant portion of the index, yet many undervalued stocks are trading well below their historical peaks. Some of these companies offer attractive dividends that may entice more income-oriented investors as interest rates decline. Altria, the largest tobacco company in America, is notably 14% under its all-time high but remains a compelling choice for dividend investors.

Altria, once known as Philip Morris, has a stronghold in the U.S. cigarette market with its iconic Marlboro brand. In 2008, the company made its international ventures independent, allowing it to concentrate on refining its domestic operations while its international counterpart expanded into lucrative overseas markets.

However, the brand may appear risky as the adult smoking rate in the U.S. hits historic lows. Between 2019 and 2024, Altria’s annual shipments of smokeable products significantly dropped—from over 103 billion sticks to about 70 billion. Concurrently, it lost market share, with its retail cigarette dominance declining from 49.7% to 45.9%, and Marlboro’s share dipping from 43.1% to 41.7%. Yet, over the past five years, Altria’s revenue excluding taxes has increased at an annual rate of 0.7%, with adjusted earnings per share rising at 3.9% per year.

This consistent growth has stemmed from strategic pricing, cost-cutting measures, and share buybacks. Altria has divested some non-core assets, like its wine division, and has been diversifying into smoke-free offerings such as e-cigarettes and nicotine pouches.

In 2024, Altria still derived 87% of its revenue from smokable products, but they’re aiming to lessen that reliance over the coming years, particularly following their $2.8 billion purchase of major e-cigarette manufacturer Njoy in 2023. They anticipate that this acquisition will contribute positively to earnings per share growth by 2026.

The company is also looking to boost sales of its On brand of nicotine pouches, alongside newer heated tobacco products, as a long-term strategy to phase out traditional cigarettes. By 2028, Altria is forecasting $5 billion in revenue from smoking cessation, which would account for nearly a quarter of its projected revenue for 2024, which is estimated to be $20.4 billion. They’re streamlining operations through an initiative aimed at achieving over $600 million in annual cost savings over five years and recently announced a $1 billion share buyback plan, equating to about 1% of its market value.

Analysts predict a 4% annual growth in Altria’s adjusted earnings between 2024 and 2027, and at $59 per share, the stock appears quite affordable at 11 times next year’s earnings. The company has consistently raised its dividend since spinning off PMI and only allocated 75% of its free cash flow to dividends in the past year, leaving plenty of room for future increases. The current dividend yield stands at 7.2%, which is notably higher than the 4.1% yield of 10-year government bonds.

Altria’s appealing valuation and substantial dividend yield are likely to attract more defensive investors as market conditions soften. While it may not rival the growth of the “Magnificent Seven” soon, it remains a dependable dividend stock worthy of consideration.

Before investing in Altria Group, it’s important to weigh the following: