What Altria’s Latest $2.75 Billion Purchase Means for Shareholders

American tobacco company Altria Group (MO -1.36%), the rights holder of the Marlboro cigarette brand in the US, recently announced a deal to acquire electronic cigarette maker NJOY Holdings for $2.75 billion in cash. Investors familiar with Altria might groan; it looks like Altria is taking another step in a multi-billion dollar takeover after squandering billions on its infamous Juul investment.

But this time there is not so much risk. Altria undoubtedly pays a high price for what it gets, but the acquisition could make much more sense in the long run given the circumstances of the deal. This is what matters to shareholders.

NJOY got what Juul couldn’t

It is well known that cigarette smoking is a steadily dying habit in the United States. Just look at Altria’s annual reports and you will see that cigarette volumes are declining each year. While price increases have boosted Altria’s profits over the years, the company has also looked for long-term business opportunities outside of smoking products. Electronic cigarette maker Juul should be, but regulators steadily derailed Juul’s business.

NJOY is the only pod-based electronic cigarette product with premarket tobacco application (PMTA) approval from the Food and Drug Administration (FDA). That means Altria can legally trade and sell NJOY’s approved products in the US market. NJOY has several approvals including the tobacco flavored devices and pods with varying nicotine levels.

Investors can see NJOY as Altria’s fast-track entry into the vaping market in America. The electronic cigarette landscape has become increasingly competitive; British American tobaccoThe Vuse device has a pending PMTA and former partner turned competitor Phillip Morris International plans to launch its products in the US market next year. Altria felt it needed a market-ready product as quickly as possible.

The 8% dividend yield isn’t going anywhere

A major acquisition could raise eyebrows among those worried about a dividend cut. But fear not; it is doubtful that the dividend will go 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 the Iqos breakup.

MO Total Dividends Paid (TTM) data by YCharts

That should be enough money to manage the acquisition and does not take into account the future cash flow of Altria’s core business. An annual free cash flow of approximately $8 billion minus $6.5 billion in dividend payments leaves another $1.5 billion in new cash by the end of the year. Management reiterated the company’s current $1 billion buyback program, underlining confidence in the balance sheet. Dividend investors don’t have much 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 vaping market can still drive long-term growth. Management estimates that vaping in the US has grown to 15% of total tobacco volume, a user base of 13.7 million users with annual sales of $7 billion.

A study by Grand View Research estimates that the global electronic 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. The regulatory hurdles of PMTAs have led to a potential race for market share, which could fuel renewed revenue growth if Altria can grab a meaningful slice of it.

Will that happen? It certainly could; NJOY has an estimated 3% share of vaping in the United States. Altria will roll out the product in its more than 200,000 outlets nationwide, where Marlboro has premium shelf space. This acquisition is not something to buy or sell the shares Todaybut it could make a big difference to investors in the future.

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.






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