Altria: What Will Drive Long-Term Growth?

Altria Group (MO) stock has dipped roughly 5% so far in 2019, significantly underperforming the broader market. The stock is trading approximately 10% above its 52-week low price. Altria has raised its dividend payments for the last ten years.

The stock is currently offering an attractive yield of approximately 6.8%, making it an interesting dividend stock. The fall in its stock price has driven Altria’s yield upward for roughly the last two years. The stock has fallen about 40% in a little more than two years.

The broader trend of adults moving away from smoking has impacted Altria’s earnings. The cigarette manufacturer expects the domestic cigarette industry volume rate to decline 5%–6% in 2019. This trend is driven primarily by increased adult smoker movement to the e-vapor category.

The company expects its compound annual average rate of domestic cigarette industry volume to decline 4%–6% through 2023. Despite these evolving trends, Altria increased its adjusted EPS in the latest quarter.

Altria continues to adapt to the ever-changing industry landscape. Some of the company’s key potential growth drivers include its investments in e-vapor product manufacturer JUUL and cannabis company Cronos Group (CRON). Altria acquired a 35% economic interest in JUUL Labs last year and its interest in Cronos Group totals about 45%.

Altria’s e-vapor category volume grew roughly 40% year-over-year in the first half of 2019, and JUUL drove nearly all of this growth. Moreover, JUUL is growing internationally and has expanded into Ireland, South Korea, Austria, and the Philippines.

Cronos is investing in cannabis research and development as well as branding. It is also focusing on cannabidiol, or CBD, with its acquisition of certain Redwood Holding’s subsidiaries, including the brand Lord Jones. Altria’s Cronos investment offers immense upside potential, especially if cannabis receives federal legalization in the United States.

The graph above shows Altria’s revenue and net income for the last ten years. Its estimated 2019 numbers are based on the company’s first-half revenue and income. The company’s revenue looks stable, with a marginal decline over the last two years.

The gain recorded on the AB InBev and SABMiller combination resulted in the spike in its 2016 net income. Plus, Altria’s normalized EPS has grown over the last five years. The company expects 4%–7% growth in its adjusted EPS in 2019.

Whether Altria can attain top-line growth remains to be seen. With its ongoing expansion as well as cost-reduction initiatives, the company seems to be moving in the right direction. Moreover, the company’s management appears to be committed to returning value to its shareholders through dividend payments and share buybacks. With this potential upside, as well as dividend returns, Altria stock appears to be trading at a very attractive valuation.