Although the tobacco story seems to be well-known and boring, a few things have happened in the recent past. The feared menthol ban is now off the table. And with a more corporate-friendly administration Trump 2.0, there’s a good chance tobacco companies won’t be further pressured. Marlboro-maker Altria massively outperformed the S&P 500 over the last twelve months with double (!) the latter’s return. Does Altria now belong into a well-suited stock portfolio? My Premium PLUS members receive my latest stock idea – an indirectly tobacco- / nicotine-related company with the potential to be a multi-bagger already by year-end.

Summary and key takeaways from today’s Weekly
– Altria surprisingly and massively outperformed the S&P 500 over the last twelve months.
– However, under the hood the worrisome trend continues. Altria is not only facing strong volume declines, but it even loses market share.
– The growth plans are not convincing, either. Especially not to justify a valuation multiple that implies some growth.

This Weekly is in parts an update to my first Altria-article which came out almost exactly two years ago (see here), but also a brainstorming session about whether Altria (ISIN: US02209S1033, Ticker: MO) could be a good pick now as many people are seeing the seemingly juicy 8% dividend yield.

Over the last two years since my first analysis, shares of Altria are up measured-by-eye by a bit over 10%. On top, the company paid high, above-average dividends. All in all, nothing extremely spectacular, but a bit more than a 10% annual return, nonetheless.

Not bad, but trailing the S&P 500 which had a much stronger run.

However, over the last twelve months which includes the S&P 500’s blockbuster year 2024, Altria in return massively outperformed the index.

The feared menthol ban is now finally buried. On the other side, a more business-friendly administration and the abandonment of ESG policies, but also uncertain and especially volatile times due to political actions like tariffs, taxes or sometimes even single tweets could make up for an ideal case for tobacco stocks – the safe haven to park money?

How does Altria look in this regard with its almost 8% dividend yield?

Later this week, my Premium PLUS members will receive my next stock idea.

In my latest research report, I am featuring a company which is indirectly tied to the tobacco industry, however, from an entirely different viewpoint. It could be the biggest beneficiary – by far. My so far spiciest idea, but the potential reward is also the highest. If it works out, many things point in this direction, I do expect a multi-bagger of 3–5x – maybe even already by year-end.

I am doing serious research. My last two such ideas:

–> was up by +178.5% and I closed the case (my “Trump Trade”)
–> is currently up by +29% in less than a month (still-active report from January ’25)

With my risks-first approach (paired with high upside), I am able to find stocks with great returns.

Join me and my members on our journey to beat the markets!

^{both as per 05 February 2025 market close – since August 2022}

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Is Altria en vogue again?

Certain investors will nonchalantly say that tobacco and the respective stocks over the last years never really were out of favor.

Since my Weekly about Altria came out, the performance of its stock is not spectacular, but respectable with a total return of 32% over two years since February 2023.

This is more than the 8–10% most investors expect on a yearly average basis.

This strong performance was mainly due to the very high dividend yield.

As you can see below, Altria’s stock in the typical stock chart hasn’t done that much over the last two years. There were much better performers.

But the dividend is clearly part of the total return, hence we need to consider it.

So far, there were no surprises, neither to the upside, nor to the downside.

People simply continue to smoke. The companies are facing the same issues they were doing already over the last decades (shrinking customer bases), but nonetheless manage to post solid results with higher margins and frequently higher dividends.

A mix of hefty price increases, but also smoke-free alternatives growing like weeds allowed for that. Not a single tobacco stock imploded and no dividend was cut.

So what’s the matter?

Not only in my Weekly about Altria, but also in other articles (see here) like about BAT (ISIN: GB0002875804, Ticker: BATS) I wrote extensively about the extremely concerning pace of shrinking cigarette volumes while at the same time the alternatives, despite growing sales, would not be able to replace the melting away legacy businesses. At least not in the foreseeable future.

Further, the premium segment would continue to lose market share towards cheaper alternatives.

So far, I was right and wrong.

Right, because the core smokable businesses continue to be under immense pressure.

I explained mathematically that it is not a question of if, but when the core tobacco businesses would enter a free fall (“the last pack of cigarettes would need to cost billions”). Until then, the alternatives would need to gain the upper hand. Also, indeed premium has continued to lose market share while the discount segment benefitted.

However, I was and continue to be skeptical whether that shift happens.

The reason is smoke free alternatives continue to require big marketing as well as research and development investments while the legacy smokeable tobacco business is as asset-light as a software company.

You hear or read that the alternatives have higher margins. But this needs to be taken with a grain of salt. It might be the case for gross margins or some company-specific margins you cannot derive from the profit and loss or cash flow statement.

Until this day at best you can read that break-evens are either around the corner or envisioned over the next years. Even for BAT which is the leader in smoke free alternatives in the US market this is the case. Not even Philip Morris (ISIN: US7181721090, Ticker: PM) where the smoke free business generates about 40% of sales already, managed to replace its legacy business.

Sales are one thing. Profitability and hard cash flows another.

I was also wrong, because tobacco stocks have performed reasonably.

Their businesses continue to hold up rather well. Smokable’s sales continue to fall slowly, held up by hefty price increases, while smoke free alternatives show double-digit sales growth rates. Also cash flows have been rather stable so far.

Dividends continue to flow, either.

If we look at Altria, today’s center of focus, we can see that especially over the last twelve months the stock has massively picked up steam. Double the performance of the S&P 500 in a strong, above-average year for the latter is quite an achievement. Especially for a practically not growing business.

Even I need to acknowledge that.

However, it hasn’t changed the fact that under the hood it does not look as rosy as the stock’s performance might suggest. That’s why I continue to avoid Altria and other tobacco stocks.

Should they trade for a 5x PE ratio, we can talk about a puff. But not as it is now.

But concretely and regarding Altria, it might be tempting to assume a turnaround is finally there. Supported by the new US administration of Donald Trump’s second term.

One of the first things that was announced shortly after the inauguration was the ban of the looming menthol cigarette ban.

We seem to have an almost ideal setup for Altria.

A more business-friendly administration, one big threat now gone and the chance for lower corporate taxes on one side, but at the same time uncertainty and volatility coming from potential trade wars, tax and tariffs threats or even single tweets which can move stock prices.

It might be tempting to think about adding some Altria shares to a portfolio.

The company would likely be in a position where it can make use of the advantages while circumventing the international issues as it is operating solely on US soil. An almost ideal shelter?

I am going to tell you now why I think this is not a good idea.

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Altria just a few days ago reported its fiscal year 2024 results.

On the surface, nothing spectacular. Sales were almost unchanged for the full year and even minimally up in the fourth quarter. Adjusted diluted earnings per share, one of Altria’s management’s favorite performance figures, showed +3.4% for the year and even +9.3% in Q4 2024.

The outlook points to another good year with adj. EPS seen rising further (single-digits).

The headline reads great. Even a new buyback of 1 bn. USD was announced.

Digging deeper, we can find the following, though. First, I like to have a look at the development over the last years for a big-picture overview.

I am starting with sales, earnings and operating cash flows.

Indeed, sales haven’t been growing for years. Worse, The peak was in 2021 and since then sales are down by more than 3%.

Altria is known to be a laggard in the smoke free alternatives area. They have a fast growing nicotine pouch business, but that’s it for now. Their NJOY vaping product which was acquired after their flopped JUUL investment, has already lots plenty of ground compared to BAT. Worse, it is even in litigation fights – with JUUL.

So, Altria as a still mainly smokable tobacco company wasn’t able to ignite a fire.

Earnings look more promising, but there are often one-time effects and tax-related stuff that distract from what’s really important.

The first thing I noticed is that excise taxes on sales have fallen by almost a full billion over the last two years. They lifted the gross profits – which were practically stable only.

In other words, this might suggest that first diseconomies of scale might already be noticeable, i.e. the opposite of scale advantages (fixed-costs spread over higher quantities). Lower volumes from shrinking smokable sticks and higher fixed costs apiece. I don’t know whether true, but it sounds plausible to me.

At least, this (excise taxes) is nothing the company can steer itself.

Now, further below.

In 2024, Altria sold its IQOS rights to Philip Morris for 2.7 bn. USD which it used to finance a bigger, in this size non-repeatable buyback program. This was the main EPS-growth driver in 2024.

For 2025, only a bit more than 1% of stock could be bought back with the new program and at current stock prices.

But the IQOS rights-sale lifted pre-tax earnings – making them look extremely high. Taxes were then again lower than in 2023 which results in a seemingly much higher net profit.

Adjusted for that, the profit is at best flat. Pre-tax definitely is.

Operating cash flow looks a bit better at first glance.

But notice, this chart from TIKR goes only until 2023. It looks like after a strong year 2018 and many years of lower cash flows, Altria managed to enter a new level with higher cash flows in 2023.

What about 2024?

From their separate release with more financial figures and a full cash flow statement, we can see that operating cash flow in 2024 was 8.7 bn. USD.

That’s less compared to 2023.

It was the second best year, yes, but a closer look also reveals that there was strong support from positive working capital effects (see especially inventories, accounts payable, income taxes; not framed below).

All this makes the results appear stronger they were organically.

Now, another layer deeper.

The smokeable products segment, i.e. cigarettes, saw lower sales. OCI or “operating companies income” which is not exactly the same as operating earnings, saw a mild boost and higher margins.

So, slightly better margins but practically flat-running.

Looking at the volume development, although Marlboro didn’t drop by another 10% or more like in the previous years, the pace to the downside is still considerable.

This was self-explanatory balanced through heft price increases which I am convinced have their limitations.

This is evidenced by the fact that especially Marlboro continues to lose market share.

This time even a full percentage point in just one year quarter-over-quarter.

Not too long ago, the market share was 44% and Altria was able to defend it for some time. Over the last three years since 2021, Altria has not only seen shrinking total revenues, but also its Marlboro market share fell further.

Unlikely a sign of strength or strong momentum.

And as you can also see on the two screenshots above, too, the discount segment is almost gone. It suffered several years with declines of around 30% per annum (!). The market share is just 1.8% as per the last quarter.

Why is this important?

At first glance, Altria has never been a major discount player, so losing this sub-segment would not be the deciding factor for them. They are competing at the top.

However, the discount segment as a whole for the entire industry is strongly on the rise as price increases have gone too far for many customers. They are simply switching to cheaper brands.

What about Altria’s alternatives?

This is a mixed bag because it contains the fast-growing nicotine pouches on!, but also legacy and shrinking chewing and snuff tobacco.

Taken together, they grew by 4.5% for the whole year. The almost excise-tax free sales (! – in the future a potential target for tax hikes) were only a smidgen above 10% of total sales – a long way to go to catch up with smokables.

Operating earnings OCI and margins after adjusting for a one-time asset impairment were up a bit.

Unfortunately, Altria isn’t breaking down sales or better OCI per oral tobacco component, but from the volumes we can approximately derive that despite its high growth rate, on! is still quite small for Altria.

That’s why I continue to have some doubts that Altria will miraculously manage to return to growth again. Lots of one-time effects and sales as a whole are not growing, despite higher total volumes when looking at everything together.

Altria also lost of a few words on their growth plans for the smoke free segment.

Until 2028, i.e. over the next four years, they want to roughly double this segment’s sales from currently 2.7 bn. USD to 5 bn. USD. While this sounds fine, the best it will be able to do is likely to balance the weaknesses of the cash cow. Not an easy task.

The dividend costs them currently ~6.8 bn. USD per year. Free cash flow in 2024 was ~8.5 bn. USD.

There’s enough margin of safety on that front.

But it bothers me that sales do not grow while volumes flush. Also, Altria losing market share with its once-unkaput-able brand Marlboro is worrisome.

The slightly higher margins are fine, but not enough as there’s a limit to how much one can squeeze out of the lemon. While potential tax cuts could boost the bottom line further, this is another external factor the company cannot control. And it does not solve any of the internal issues Altria clearly has.

I need a healthy company with decent prospects and realistic upside.

Altria doesn’t offer me that. This is at best a “the dividend is still safe”-play. But probably not worth from a risk-and-reward perspective. Especially, should the brand quality of Marlboro started to be questioned if it drops below 40% which could happen over the next 12–18 months.

All that changes hands for an enterprise value of 110 bn. USD and a free cash flow of ~8.5 bn. USD. That’s a multiple of 13x which even has priced in some decent low single-digit growth.

No, thank you!

The research report I am going to send to my Premium PLUS members soon features an entirely different calibre. The company I discuss is indirectly linked to the tobacco- / nicotine-industry and it has the chance to make really big waves. If it succeeds, not only an entire industry will be put upside down, but the stock will likely multiply as a result (before the company receives a buyout offer).

Potentially: 3–5x by year-end.

Conclusion

Altria surprisingly and massively outperformed the S&P 500 over the last twelve months.

However, under the hood the worrisome trend continues. Altria is not only facing strong volume declines, but it even loses market share.

The growth plans are not convincing, either. Especially not to justify a valuation multiple that implies some growth.

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