Altria Q3: Why They Just Became My Second-Largest Holding

Introduction

Altria (NYSE:MO) recently reported its Q3 earnings and let’s just say investors were not happy. Since then, the stock has fallen over 7% and now trades below $40 and hit a new 52-week low of $39.06. The stock has not seen a price this low since November 20th of 2020 when it opened at $39.84 and closed below $40. Since then they have traded around or above $40. Taking advantage of the dip, I quickly bought more shares as I believe the negative sentiment to be short-lived and expect the stock to quickly get back above $40. Accumulating more shares made MO my second largest holding currently in my portfolio. And in this article I will tell you why I think MO presents a perfect opportunity to buy more shares to collect those huge dividends.

Earnings Disappointment

Let’s jump right into it. I last covered the stock back in August where I talked about the NJOY acquisition. Since then investors have been waiting for some good news, especially after the JUUL deal went sour. Fast forward to now. Altria reported its Q3 earnings before the opening bell on Thursday, October 26th missing on both the top and bottom line. MO reported earnings per share of $1.28, missing analysts’ estimates by $0.02. They also missed on revenue by $150 million, coming in at $5.28 billion. With so much uncertainty going on right now, and investors waiting patiently for the company to report some good news with the recent acquisition of NJOY, they go and miss on both. This is what sent the stock tumbling to a new 52-week low. And to top it off, management narrowed its full-year guidance and now expects it to be between $4.91 to $4.98, down from the $4.89 to $5.03 prior. But this narrowed guidance still represents growth of nearly 1.5% from full-year EPS of $4.84 in 2022.

I understand that as an investor this is not great news to hear or see. But as I’ve mentioned previously, companies will have some great quarters, good quarters, and not so good ones. Not anything to get super excited about but growth is still growth. It’s just the nature of the business. Throw in high treasury rates, and investors are more inclined to say “forget this,” and go buy 90-day T-Bills or a CD for that matter. For those with a short-term mindset for investing, I say go ahead and switch your strategy. Again, if you have a longer outlook, you understand short-term volatility creates long-term opportunities. And I took advantage and bought more, bringing MO to my 2nd largest holding. Collecting nearly $1 a share per quarter in dividends while I wait for the price to recover? That’s a no-brainer if you ask me.

Now some might say, “the price may never recover” and I say to that, “it may not.” But as a buy-and-hold investor, I know things take time. And investing takes patience. I can honestly say out of all the things I’ve learned investing, patience is the one thing I learned the most. If you can master this and control your emotions, you will likely become a successful investor in my view. Peter Lynch said, “The most important organ is your stomach not your brain.”

Trust me. Take it from someone who started investing during the Great Financial Crisis. I didn’t know what I was doing back then, but during times of uncertainty, it’s very easy for stocks to move up or down. Anything that can be considered slightly positive or negative can move the stock in either direction.

The Smokeable Segment Decline

Smokeable products revenue fell 5.3%. This was due to lower shipment volume and higher promotional investments. The segment also reported domestic cigarette volumes declined 11.6% in the third quarter and 10.6% in the first 9 months. At the industry level this was less at 8% in Q3 and in the first nine months. With the acquisition of NJOY management planned to accelerate its adoption into the business model. Well that didn’t happen.

Management’s goal was to distribute NJOY to 43k stores by this quarter. Instead they grew distribution to 42k, 1k less than their target. But as seen below, ACE is now distributed in all the top-25 convenience store chains by e-vapor volume. So although they didn’t hit the target, this is still impressive. And the end-of-year target of 70k stores is still in play. It’s important to remember prior to the quarter, NJOY had a very small footprint in the retail space. After, ACE is expected to represent nearly 70% of e-vapor volume and 55% of cigarette volume sold in the US multi-outlet and convenience store channel.

So people will say, “They missed the target.” Yes, they did but the product now has more visibility and product fixture space which means more eyes, likely more sales. NJOY is not some acquisition the company made years ago that we’re still waiting to take effect in the business. This was recent and these take time. Some acquisitions are immediately accretive for businesses, but as investors it’s important not to focus on the negative in my opinion. Instead of “they missed the target” say, “But now they have more visibility” which means potentially more revenue and growth. And with only one quarter of full ownership, the NJOY acquisition is still in its initial stages.

Focus On The Positives

It’s no secret traditional smoking has been on the decline in the U.S. for years. But what about oral tobacco growth? In the last two years this has grown from 3% to 5% in the nine months ended. And on! shipment volume has increased by nearly 8 million, or 36.7% year-over-year. The nicotine pouch category grew 5% in total U.S. tobacco volumes over six months. Helix also improved profitability and on! plus began its test launch in Sweden, which is currently one of the largest modern oral tobacco markets globally.

Additionally, cigarette volume declines can be attributed to increased gas prices. This was especially apparent in Q1 to Q2 of 2022 when gas prices surged. Although nicotine is addicting, high gas prices affect consumption. From a personal experience of living in California, I can tell you that there were some places where gas was upwards of $7 a gallon. Depending on where you live some may have seen higher.

Another positive which, I assume most investors are happy about, is the company conducted their 58th dividend increase in the last 54 years to $0.98 a share. Furthermore, they repurchased a total of 5.9 million shares for $260 million during the quarter, returning more than $5.7 billion through dividends and repurchases. They currently have $268 million left under the current contract which management expects to complete by the end of this year. And I expect more shares to be repurchased in Q4 as the price has dropped since earnings, especially if the price stays suppressed.

Another positive factor for the company is the recent rise in adult vapers in the past 30 days. And as NJOY gets distributed to more convenience store channels, I see this as a huge benefit for Altria. Vaping is considered to be a healthier alternative to traditional smoking and consumers are starting to become more health conscious. This is apparent by the recent popularity of weight-loss drugs. Since 2014 adults who smoke have risen over 156%, or nearly 7 million. Vapers who don’t smoke experienced a lesser rise at 22.2%, or 3 million.

Risks

I expect cigarette volumes to continue to decline due to the current macro environment and the growth of illegal flavored disposable e-vapor products. Management expects this contributed to declines in the cigarette industry by 1.5% to 2.5% percent in the last 12 months. Another risk the company faces is if they fail to reach their 70k target of stores for ACE by year-end. Even though they missed the mark this quarter by 1k stores, anything considered negative by investors will likely drive the price down even further. Another factor is the state of California’s flavor ban. A study recently found overwhelming evidence of a large, illicit marketplace of flavored, e-vapor & menthol cigarette products in the state. This is thought to cost the state a loss of more than $1 billion annually in cigarette excise tax revenues. I believe Altria will fight to make these products legal but until then it will continue to affect revenues going forward.

Furthermore, if we enter into a recession, MO may experience a decline in sales as consumers look for discounted cigarette brands from competition as spending becomes tighter. Stricter tobacco laws & regulations also pose a serious risk for tobacco companies as well. Although MO pays a large dividend, investors should be cautious as these threats could seriously impact their finances going forward. But for now I think Altria is safe but will continue to face scrutiny from investors for the foreseeable future.

Conclusion

Altria is very popular amongst investors as they have a long track record of paying out large dividends. With the recent earnings disappointment, this has caused negative sentiment with investors, sending the price tumbling to new a 52-week low. MO is considered a risky investment and one that should always be watched closely. But I still have faith in the company, the recent NJOY acquisition, and expect them to continue expanding. Furthermore, the oral tobacco segment continues to do well but is often overshadowed by the declines in traditional smoking. The company has only one full quarter with the NJOY acquisition and I think this will take time to become accretive and requires patience from investors. For now, MO remains my second largest holding and I think due to the price decline, those with a long-term outlook are getting a great margin of safety.