What Altria’s Latest $2.75 Billion Purchase Means for Shareholders
US tobacco company Altria group (Mon -1.36%), the US rights holder of the Marlboro cigarette brand, recently announced an agreement to acquire electronic cigarette maker NJOY Holdings for $2.75 billion in cash. Investors familiar with Altria might groan; It looks like Altria is about to take another shot at a multibillion-dollar acquisition after blowing up billions on its infamous Juul investment.
But this time there isn’t nearly as much risk. Altria is undoubtedly paying a heavy price for what it’s getting, but the acquisition could make far more sense over the long run given the deal’s circumstances. That’s what matters to the shareholders.
NJOY achieved what Juul failed to do
It is well known that cigarette smoking is a steadily dying habit in the United States. Just take a look at Altria’s annual reports and you’ll see that cigarette shipments are declining every year. While price hikes have boosted Altria’s earnings over the years, the company has also begun looking for long-term business opportunities outside of smokable products. Electronic cigarette company Juul was supposed to be, but regulators steadily shut down Juul’s business.
NJOY is the only sleeve-based electronic cigarette product with a Food and Drug Administration (FDA) Premarket Tobacco Application (PMTA) approval. This means Altria can legally market and sell NJOY’s approved products in the US market. NJOY has multiple approvals including tobacco flavored devices and capsules with different levels of nicotine.
Investors can think of NJOY as Altria’s fast track to America’s vaping market. The electronic cigarette landscape has become increasingly competitive; British-American TobaccoThe Vuse device from has an outstanding PMTA and has turned a former partner into a competitor Phillip Morris International plans to bring its products to the US market next year. Altria felt they needed a market-ready product as soon as possible.
The 8% yield dividend isn’t going anywhere
A significant acquisition may raise the eyebrows of those worried about a dividend cut. But fear not; It’s doubtful the dividend is going anywhere. Altria has $4 billion in cash and will write a check to NJOY. In addition, Altria will receive $1.7 billion from Philip Morris International in July as part of its separation from Iqos.
MO Total Dividends Paid (TTM) data by YCharts
That should be enough money to handle the acquisition and doesn’t factor in future cash flow from Altria’s core business. Annual free cash flow of approximately $8 billion less $6.5 billion in dividend payments leaving an additional $1.5 billion of new cash through year-end. Management reiterated the company’s current $1 billion share repurchase program and underscored confidence in the balance sheet. There’s not much for dividend investors to worry about until something changes.
The electronic market could move the needle
Why is Altria still chasing the e-cigarette market after wasting billions on Juul? Because the US steam market could still boost long-term growth. Management estimates that vaping has grown to 15% of total tobacco volume in the U.S., a user base of 13.7 million users with $7 billion in annual revenue.
A study by Grand View Research estimates that the global e-cigarette market could grow at an average annual rate of 30% through 2030. The United States has traditionally been one of the most lucrative markets for nicotine products due to the country’s high disposable income. PMTAs’ regulatory hurdles have created a potential race for market share that could fuel newfound revenue growth if Altria can snag a meaningful share of it.
will this happen It certainly could; NJOY has an estimated 3% retail share of vaping in the United States. Altria will introduce the product at its more than 200,000 points of sale nationwide where Marlboro has prime shelf space. This acquisition is nothing to buy or sell the stock Todaybut it could make a big difference for investors down the road.
Justin Pope has no position in any of the stocks mentioned. The Motley Fool recommends British American Tobacco Plc and Philip Morris International and recommends the following options: long January 2024 $40 calls on British American Tobacco Plc and short January 2024 $40 puts on British American Tobacco Plc. The Motley Fool has a disclosure policy.