Key Points Altria fell short of top-line estimates in Q3, reporting a decline in revenue. Consumers are trading down to discount cigarettes due to discretionary spending pressures. The company continues to face challenges with its pivot to next-gen challenges. 10 stocks we like better than Altria Group › Shares of Altria (NYSE: MO) were heading lower last month as the Marlboro-maker disappointed investors with its third-quarter earnings report. Heading into the report at the end of the month, th ...

Financial Performance - For the third quarter, adjusted diluted earnings per share increased by 3.6%, and for the first nine months, it grew by 5.9% [5][20] - Adjusted operating companies income (OCI) for the smokeable products segment grew by 0.7% to nearly $3 billion in the third quarter and by 2.5% to $8.4 billion for the first nine months [20] - Adjusted OCI margins expanded to 64.4% for both the third quarter and first nine months, representing margin growth of 1.3 percentage points and 2.7 percentage points, respectively [20] Business Segment Performance - Domestic cigarette volumes declined by 8.2% in the third quarter and 10.6% for the first nine months when adjusted for trade inventory movements and calendar differences [21][22] - Marlboro expanded its share of the premium segment by 0.3 to 59.6% in the third quarter, while the discount segment of the industry expanded by 2.4 share points year over year, with Basic capturing over half of that growth [22][23] - In the oral tobacco products segment, adjusted OCI declined by less than 1% in the third quarter, but adjusted OCI margin expanded by 2.4 percentage points to 69.2% for the first nine months [24][25] Market Data - The nicotine pouch category saw an estimated 14.5% increase in industry volume over the past six months, with ON's retail share of the total oral tobacco category at 8.7% for the third quarter [6][8] - The e-vapor category included approximately 21 million vapers at the end of the third quarter, up nearly 2 million from a year ago, with flavored disposable e-vapor products representing over 60% of the category [13][15] Company Strategy and Industry Competition - The company announced a collaboration with KT&G to explore opportunities in international innovative smoke-free products and non-nicotine products [5][18] - The FDA's pilot program to streamline PMTA reviews for oral nicotine pouches is seen as a positive development, with ON+ applications included in the program [16][17] Management Commentary on Operating Environment and Future Outlook - Management noted that consumers are under pressure but are seeing some consistency in gas prices and inflation, which may influence purchasing behavior [33] - The company raised the lower end of its 2025 guidance range, now expecting adjusted diluted EPS in the range of $5.37 to $5.45, representing a growth rate of 3.5% to 5% from a base of $5.19 in 2024 [26][27] Other Important Information - The company returned nearly $6 billion to shareholders in the first nine months, including $5.2 billion in dividends and $712 million in share repurchases [27] - The board authorized the expansion of the share repurchase program from $1 billion to $2 billion, which now expires on December 31, 2026 [27] Q&A Session Summary Question: Insights on fourth quarter earnings growth and smokeable OCI - Management acknowledged the impact of share repurchase and MSA legal fund expiration on earnings growth, emphasizing the need to monitor consumer spending in a dynamic marketplace [30][31] Question: Drivers behind moderation in cigarette industry decline - Management indicated that consistency in consumer pressures, such as gas prices and inflation, may be contributing to the moderation observed [32][33] Question: Performance and initiatives for the nicotine pouch category - Management expressed satisfaction with ON's performance despite competitive pressures and highlighted the importance of retail takeaway volume as a measure of consumer demand [36][38] Question: KT&G partnership and operational efficiencies - Management outlined three prongs of the partnership: expanding ON and ON+ internationally, exploring non-nicotine opportunities, and improving operational efficiencies [39][41] Question: ON+ pricing strategy and controllable costs - Management confirmed ON+ is positioned as a premium product and discussed the importance of long-term cost management strategies in the smokeable category [46][49]

Financial Data and Key Metrics Changes - Adjusted diluted earnings per share increased by 3.6% in Q3 and by 5.9% for the first nine months [20] - Adjusted operating companies income (OCI) for smokeable products grew by 0.7% to nearly $3 billion in Q3 and by 2.5% to $8.4 billion for the first nine months [20] - Adjusted OCI margins expanded to 64.4% for both Q3 and the first nine months, representing margin growth of 1.3 percentage points and 2.7 percentage points respectively [20] Business Line Data and Key Metrics Changes - Domestic cigarette volumes declined by 8.2% in Q3 and 10.6% for the first nine months when adjusted for trade inventory movements [21] - The oral tobacco products segment saw adjusted OCI decline by less than 1% in Q3, but adjusted OCI increased by 3.3% with margin expansion of 1.8 percentage points to 69% [24][25] - Helix's reported shipment volume for on! increased by nearly 1% in Q3 and approximately 15% for the first nine months [8] Market Data and Key Metrics Changes - The nicotine pouch category grew to 55.7 share points, an increase of 11.1 share points year-over-year [7] - The e-vapor category included approximately 21 million vapers, up nearly 2 million versus a year ago [13] - The discount segment of the industry expanded by 2.4 share points year-over-year, with Basic capturing over half of that growth [23] Company Strategy and Development Direction - The company is focusing on expanding its smoke-free portfolio and exploring international opportunities through a collaboration with KT&G [5][18] - The launch of on! PLUS is seen as a premium product aimed at appealing to both adults who dip and competitive nicotine pouch consumers [10] - The company is committed to returning value to shareholders, as evidenced by a recent dividend increase and an expansion of the share repurchase program [5][27] Management Comments on Operating Environment and Future Outlook - Management noted that consumers are under pressure but are seeing some consistency in gas prices and inflation [33] - The company is optimistic about the regulatory environment, particularly with recent FDA actions that may streamline product authorizations [16] - The company raised the lower end of its 2025 guidance range, expecting adjusted diluted EPS in the range of $5.37-$5.45, representing a growth rate of 3.5%-5% from a base of $5.19 in 2024 [26] Other Important Information - The company returned nearly $6 billion to shareholders in the first nine months, including $5.2 billion in dividends and $712 million in share repurchases [27] - The balance sheet remains strong, with a debt to EBITDA ratio of 2x as of September 30 [28] Q&A Session Summary Question: Insights on fourth quarter earnings growth and smokeable OCI - Management acknowledged the impact of share repurchase and MSA legal fund expiration on earnings growth, while monitoring consumer spending in a dynamic marketplace [31] Question: Drivers behind the moderation in cigarette industry decline - Management indicated that consistency in consumer pressures and stepped-up enforcement in e-vapor are influencing market dynamics [34] Question: Performance and positioning of on! in a competitive environment - Management expressed satisfaction with on!'s performance despite competitive pressures, highlighting steady retail takeaway volume [37] Question: Opportunities from the KT&G partnership - Management outlined three prongs of the partnership: expanding modern oral initiatives, exploring non-nicotine opportunities, and improving operational efficiencies [40] Question: Pricing strategy for on! PLUS - Management confirmed that on! PLUS is positioned as a premium product, with introductory price promotions planned for its launch [48] Question: Impact of FDA pilot program on product launches - Management emphasized the importance of a functioning regulatory system and indicated that decisions will be made in the long-term best interest of the company [57]

Financial Data and Key Metrics Changes - Adjusted diluted earnings per share increased by 3.6% in Q3 and by 5.9% for the first nine months [18] - Adjusted operating companies income (OCI) for smokeable products grew by 0.7% to nearly $3 billion in Q3 and by 2.5% to $8.4 billion for the first nine months [18] - Adjusted OCI margins expanded to 64.4% for both Q3 and the first nine months, representing margin growth of 1.3 percentage points and 2.7 percentage points respectively [18] Business Line Data and Key Metrics Changes - Domestic cigarette volumes declined by 8.2% in Q3 and 10.6% for the first nine months when adjusted for trade inventory movements [18] - Marlboro expanded its share of the premium segment by 0.3 to 59.6% in Q3 [19] - The oral tobacco products segment saw adjusted OCI decline by less than 1% in Q3, but adjusted OCI margin expanded by 2.4 percentage points to 69.2% for the first nine months [22] Market Data and Key Metrics Changes - The nicotine pouch category grew to 55.7 share points, an increase of 11.1 share points year over year [5] - The e-vapor category included approximately 21 million vapers, up nearly 2 million versus a year ago [11] - Retail share for oral tobacco products was 31.1% for Q3 and 32.9% for the first nine months [23] Company Strategy and Development Direction - The company is focusing on expanding its smoke-free portfolio and exploring international opportunities in innovative smoke-free products [4][15] - A collaboration with KT&G was announced to explore opportunities in international innovative smoke-free products and non-nicotine products [4][16] - The company aims to maintain profitability in the premium segment while also investing in the discount segment to capture price-sensitive consumers [20][21] Management's Comments on Operating Environment and Future Outlook - Management noted that consumer spending remains under pressure due to macroeconomic factors, but they are optimistic about maintaining profitability [30] - The company raised the lower end of its 2025 guidance range, expecting adjusted diluted EPS in the range of $5.37 to $5.45 [24] - Management emphasized the importance of a functioning regulatory system and the need for accelerated product authorizations from the FDA [14][54] Other Important Information - The company returned nearly $6 billion to shareholders, including $5.2 billion in dividends and $712 million in share repurchases [25] - The board authorized the expansion of the share repurchase program from $1 billion to $2 billion, which now expires on December 31, 2026 [25] Q&A Session Summary Question: Insights on fourth quarter earnings growth deceleration - Management acknowledged the impact of share repurchase and MSA legal fund expiration on earnings growth, while monitoring consumer spending [29][30] Question: Drivers behind the moderation in cigarette industry decline - Management indicated that consistency in gas prices and inflation may have contributed to the moderation in decline [31][32] Question: Performance and positioning of ON in the nicotine pouch category - Management expressed satisfaction with ON's performance despite competitive pressures and highlighted the importance of retail takeaway volume [33][34] Question: Opportunities from the KT&G partnership - Management discussed three pronged opportunities: expanding ON internationally, exploring non-nicotine products, and improving operational efficiencies [36][39] Question: Clarification on duty drawbacks and EPS growth - Management stated that duty drawbacks are an additional benefit but emphasized the need for a functioning regulatory system for long-term decisions [52][54] Question: Impact of FDA pilot program on ON+ launch - Management clarified that decisions will be based on long-term interests and the functioning of the regulatory system [53][54]

Core Viewpoint - Altria Group, known for its Marlboro brand, faces an uncertain future despite its history of consistent dividend increases and dominance in the tobacco market [1][2]. Industry Transition - The tobacco industry is shifting from combustible cigarettes to smoke-free products, with Altria's ability to adapt to these trends being crucial for its long-term viability [2][5]. - The U.S. tobacco market remains lucrative, with Altria holding a 41% share of the retail cigarette market and 59.5% of the premium segment [4]. Product Development Challenges - Altria has struggled to establish itself in the next-generation product categories, including electronic vapes and heated tobacco devices, following a failed investment in Juul and a recent patent loss [5][6][7]. - Oral nicotine salt pouches have been Altria's most successful smoke-free product, but it still lags behind competitors like Philip Morris International's Zyn [8]. Financial Performance - In Q2 2025, approximately 83% of Altria's operating income came from smokeable products, indicating that smoke-free products are not yet a significant revenue source [9]. - The legacy smokeable segment remains profitable, allowing Altria to slowly increase free cash flow per share through price hikes and stock repurchases [10]. Dividend and Growth Outlook - Altria recently raised its dividend by 3.9%, offering a starting yield of 6.5%, with analysts projecting an average earnings growth of 3.4% annually over the next three to five years [11][12]. - The company is expected to maintain steady dividend growth for at least another five years, provided it can improve its performance in next-generation products [12]. Distribution Network Advantage - Altria's extensive distribution network, built through its Marlboro brand, positions it to potentially regain market share in new product categories if it executes effectively [13]. Investment Considerations - Altria is considered a strong high-yield dividend stock, appealing to investors seeking steady income, though it may not be suitable for those looking for high growth and capital gains [14][15]. - The company must enhance its product rollout and market presence in the transitioning nicotine industry to secure its long-term position [16].

Investment Rating - The report indicates a positive outlook for the new tobacco products industry, with a focus on the growth potential of smokeless tobacco and nicotine pouch segments [8]. Core Insights - The global market for new tobacco products is projected to reach $86.96 billion in 2024, reflecting a year-on-year growth of 13.1%, with significant contributions from smokeless tobacco, vaping, heated tobacco, and oral nicotine products [2][17]. - The report highlights the strong performance of smokeless tobacco and nicotine pouch products, with the latter expected to grow by 51.0% year-on-year in 2024 [2][3]. - The market dynamics are shifting, with North America, Western Europe, and Asia-Pacific regions showing robust growth, particularly in the U.S., which remains the largest market for new tobacco products [23][24]. Summary by Sections 1. Global Market Overview - The new tobacco products market is expanding steadily, with a compound annual growth rate (CAGR) of 16.8% from 2017 to 2024 [17]. - By 2025, the market is expected to continue its growth trajectory, with projections indicating increases across all product categories [2][17]. 2. Nicotine Pouches - The global nicotine pouch market is experiencing rapid growth, with a projected market size of 21.2 billion pouches in 2024, marking a 37% increase year-on-year [3]. - Major tobacco companies dominate this segment, with significant market shares held by PMI, BAT, and Altria [3]. 3. Philip Morris International (PMI) - PMI's revenue from new tobacco products is expected to reach $14.66 billion in 2024, a 17.0% increase, with heated tobacco product shipments growing by 11.5% [4]. - The number of PMI's new tobacco users has reached 32.2 million, with a 72.0% replacement rate of traditional cigarette consumers [4]. 4. British American Tobacco (BAT) - BAT is accelerating its "smokeless strategy," with its modern oral tobacco segment showing a 47% revenue increase [5]. - The launch of the Glo Hilo product is anticipated to disrupt the current heated tobacco market dynamics [5]. 5. Altria - Altria's NJOY brand has shown significant growth, with a 15.3% increase in sales volume in 2024 [6]. - The on! brand also experienced a 40.2% increase in sales, indicating a strong performance in the oral nicotine segment [6]. 6. Imperial Brands - Imperial Brands reported a 24.2% revenue increase in its new tobacco segment, driven by strong performance in Europe [6]. - The company is actively launching new products to cater to changing consumer preferences [6]. 7. Japan Tobacco - Japan Tobacco's new tobacco revenue is projected to reach 989 billion yen in 2024, reflecting a 21.1% increase [7]. - The Ploom brand is expanding its presence in emerging markets, contributing to overall sales growth [7]. 8. Investment Recommendations - The report recommends focusing on companies like Smoore International, which is well-positioned to benefit from the expanding vaping market and partnerships with major players like BAT and NJOY [8].

Core Viewpoint - Altria remains an attractive investment for income investors due to its long history of dividend increases and its current high dividend yield of 7% [1][14] Company Strategy - Altria has faced challenges over the past decade due to declining smoking rates and strategic missteps, including a $12 billion investment in Juul and a failed investment in Cronos Group [5] - The company has shifted focus to smoke-free products, selling the rights to market Iqos back to Philip Morris International and investing in Njoy, which has received FDA marketing authorization for its pod-based e-vapor product [6][8] - Altria's next-gen portfolio includes on!, an oral nicotine pouch, and a new heated tobacco product called Ploom, developed in partnership with JT Group [7] Market Performance - Njoy's consumables saw a 15.3% increase to 12.8 million units, and device shipments rose 22.2% to 1.1 million, with retail market share nearly doubling to 6.4% [8] - Despite Njoy's growth, cigarettes still account for the majority of Altria's revenue, with volume sales declining from 76.4 million in 2023 to 68.6 million in 2024, while smokeable products represented 88% of revenue in 2024 [9] Future Goals - Altria aims for a mid-single digits adjusted earnings per share (EPS) compound annual growth rate (CAGR) off $4.84 in 2022, with adjusted EPS rising 3.4% to $5.12 in 2024, resulting in a 2.9% CAGR over the last two years [10] - The company plans to increase its dividend by mid-single digits annually, following a 4.1% increase in 2024, and targets a debt-to-EBITDA ratio of 2, currently at 2.1 [11] - Altria expects to maintain an adjusted operating margin of at least 60% through 2028, although it has struggled to meet growth targets and has adjusted its expectations for Njoy's cash flow contributions [12] Investment Outlook - Altria's stock trades at a price-to-earnings ratio of 12, with a 7% dividend yield, indicating potential for success even if not all 2028 goals are met [13] - In the current economic climate, Altria is positioned to potentially outperform the S&P 500, benefiting from its status in the consumer staples sector and the consistent demand for its products [14] - Overall, despite declining cigarette consumption, Altria is expected to be in a better position three years from now [15]