Over the last 25 years, Altria (NYSE:MO) returned nearly 3,900% for investors, as compared to a 601% return on the S&P 500. There’s no reason to think Altria stock will be stuck in place for too long.
Most of its growth, though, was thanks to strong cigarette sales and rising dividend yield. Unfortunately, the MO stock just slipped from its lofty highs, tumbling to a low of $39.44. All as smoking among U.S. adults reached its lowest levels on record and the vaping controversy forced investors to flee.
However, while MO stock looks like a slow-motion train wreck now, it’s still offering investors a long-term buy and hold opportunity with a dividend yield of 7.25%.
Negatives Have Dogged Altria Stock
As of 2017, cigarette smoking plummeted to its lowest level on record among U.S. adults, according to the U.S. Centers for Disease Control and Prevention (CDC) and the National Institutes of Health’s Cancer Institute (NCI).
In fact, by 2017, only 14% of U.S. adults were current smokers, down 67% over the last 54 years. Of course, that’ll hit Altria’s bottom line.
Then again this wasn’t a big shock. The industry has been in decline for years. In its second-quarter earnings report, Altria even forecast a 5% to 6% decline in cigarette volumes just in the U.S. All as consumers began to switch to vaping. So, Altria then got involved with vaping, which became incredibly popular until it led to “mysterious illness” across the U.S.
With a health scare raging, President Trump said he was preparing to ban flavored e-cigarettes back in September 2019.
“The Trump Administration is making it clear that we intend to clear the market of flavored e-cigarettes to reverse the deeply concerning epidemic of youth e-cigarette use that is impacting children, families, schools and communities,” Health and Human Services Secretary Alex Azar said, as quoted by NBC News.
On top of that, the U.S. FDA’s Scott Gottlieb warned that:
“E-cigs have become an almost ubiquitous — and dangerous — trend among teenagers. The disturbing and accelerating trajectory of use we’re seeing in youth, and the resulting path to addiction, must end. The FDA cannot tolerate a whole generation of young people becoming addicted to nicotine as a tradeoff for enabling adults to access these products.”
All of that weighed on Altria, and helped end merger plans with Phillip Morris (NYSE:PM).
However, while the Altria stock story appears colder than a wet match, short-term, the company is still attractive long-term with dividend intact.
Altria Stock and the Future of Heated Tobacco
There are certainly near-term challenges with the stock.
However, Piper Jaffray analyst Michael Lavery has a $49 price target on the MO stock.
He notes that while iQOS (tobacco heating systems) is a product of Philip Morris, it “focuses solely on overseas markets” and that “Altria will spearhead its rollout in the U.S.” Despite all of the negative news on vaping, Lavery says the cigarette business will increasingly demand on reduced-risk products like iQOS, which received regulatory approval just last year.
In addition, earlier this month, Altria announced it was launching an iQOS product.
iQOS is not a cigarette or a vaping device. It simply heats tobacco without burning it. Plus, it’s designed to give users the same hit of nicotine as smoking with fewer toxins.
“It’s perfect timing,” said Lavery. “I don’t think they would have expected some consumer uncertainty around vapor coinciding with the launch of Iqos in the U.S.”
The Bottom Line on Altria Stock
Altria’s stock may be down considerably over the last several months, but at nearly 14 times trailing earnings and 10 times next year’s estimates with a yield of 7.25%, it’s a cheap stock worth holding for the next several years. Granted, there are challenges ahead with declining smokers, but iQOS may be a key driver going forward.
While I’m not a fan of MO for the immediate term, I do believe the long-term growth story is intact and strong.
As of this writing, Ian Cooper did not hold a position in any of the aforementioned securities.
