For decades, Philip Morris was a dividend investors dream. A stable company that would increase its dividend annually. Then tobacco lawsuits began to pop up and the company decided to split itself up for the long term health of the company. So in 2003, Altria (NYSE: MO) was born.
Since the spin off, Altria stock has done well and it has continued the trend of annual dividend increases. But last month, word came from the Food And Drug Administration (FDA) that it is going to start requiring tobacco companies reduce the amount of nicotine in their cigarettes.
As a result, the stock price plummeted by 13%. As we all know, investors tend to overreact to both good and bad news. So in this case, did investors overreact and is now a great chance to buy Altria while on sale?
The Future Of Altria
Before we can definitively say whether Altria is buy, we need to better understand what the future holds. First we need to look at the lowering of nicotine in cigarettes.
According to the National Institute of Health, a typical cigarette contains between 10 to 15 milligrams of nicotine. The average smoker ingests roughly 1 to 2 milligrams of nicotine per cigarette.
In order to lower the amount of nicotine so that it is non-addictive, the National Institute of Health estimates that 0.5 milligrams is the limit of how much nicotine can be in a cigarette. This number however is not uniform as different people ingest different amounts of nicotine based on various factors.
Just understanding that is a major red flag for the future of tobacco companies. But we have to remember they also offer other products as well, namely e-cigarettes.
Before last month, the future for e-cigarettes also looked dim. But the FDA changed its mind regarding the date for FDA approvals and is allowing tobacco companies until 2022 to provide information for FDA approval.
Altria has an inside track on this market as Philip Morris has already submitted an application to the FDA to have its iQOS device labeled as “reduced risk”. If approved, it will be a huge hurdle that the company has overcome.
So Is Altria A Buy?
Should you buy Altria at these price levels? I think so. While the trend sees fewer people smoking cigarettes, everyone will not quit overnight. And the industry is working hard to come up with alternative products. In addition, the new FDA regulations will not be going into effect any time soon. It will be years before the requirement goes in place.
Recently Altria reported earnings per share of $0.85, missing estimates by $0.01. Revenues came in at $5.07 billion, which beat estimates by $50 million. This was also an increase of 4%.
So while the industry is slowly falling out of favor, it will be a long time until Altria is not turning a profit on a regular basis. And to add to this, they continue to increase their dividend. Just last week, they raised the dividend again, which currently stands at a 4% yield.
At the end of the day, I would be a buyer of Altria at these price levels. I feel that investors overreacted and sold off more than warranted. Getting in now could earn you a nice 5-8% gain and earn a healthy dividend on top of that.
This author has no positions in any stock mentioned and does not plan to open any positions in any stocks mentioned for at least 72 hours after publication of this article.