Is Altria Group About to Go Up in Smoke?

Altria Group has rewarded shareholders for decades through reliable dividend payments and share buybacks. In fact, the tobacco giant has increased its dividend 48 times over the past 45 years. Much of this success is a result of Altria's strong portfolio of premium brands including Marlboro, Skoal, and Black & Mild. However, the tobacco industry is in the midst of its biggest shift in centuries as more consumers opt for electronic cigarettes over traditional smokes. This could negatively affect Altria Group going forward, as traditional tobacco sales made up more than 89% of the company's net revenue in fiscal 2013.

Where there's smoke ...
There isn't a person on the planet today that would tell you smoking is healthy for you. More than 5 million people die each year from smoking, according to The Economist. As a result, more companies are taking a stand against smoking than ever before. San Francisco and Boston have outlawed the sale of tobacco products in all retail pharmacies. And earlier this year, CVS Caremark banned the sale of cigarettes in its stores nationwide, taking a $2 billion haircut in revenue as a result. The pharmacy and wellness chain believes these bans will significantly reduce the number of people who buy tobacco products today -- creating a worrisome trend for big tobacco companies like Altria.  

It isn't too surprising then, that revenue from Altria's "smokeable" products and cigarettes fell 1.2% in the second quarter. The company blamed lower shipment volume for the decline. Volume in Altria's premium cigarette segment suffered the most, falling more than 10% in the period, followed by a near 5% decline in its Marlboro products.

Part of the problem is more smokers are choosing vapor products over traditional cigarettes. Sales of electronic cigarettes and refillable vaporizers more than doubled during both 2012  and 2013, with sales of around $1.7 billion last year. While that is still a drop in the bucket of the $89 billion tobacco industry, e-cigs and vapors are gaining popularity with younger would-be cigarette smokers.

The Center for Disease Control estimates that as much as 10% of all high school students tried e-cigarettes last year. This means the next generation of smokers may not be buying packs of Marlboro or other traditional smokes, but so-called e-cigs instead. Today, the number of electronic cigarette and vapor users is already swelling around the world. More than 7 million people were believed to be using e-cigs in Europe last year, and that number continues to grow both overseas and in the United States.

If you can't beat 'em, join 'em
Nonetheless, Altria and other traditional cigarette brands won't go down without a fight. To combat the movement away from tobacco smokes, Altria introduced its own e-cig brand last year. The tobacco giant formed Nu Mark LLC and rolled out its MarkTen e-cigarettes in test markets in Indiana and Arizona last year. Altria has since expanded its MarkTen brand nationally.

The company was able to get its MarkTen smokeless products into 60,000 retail stores in the western part of the U.S. so far this year. Additionally, Altria's Nu Mark business acquired the e-vapor company called Green Smoke. While this is still a small portion of Altria Group's overall business, it opens a door for the tobacco company into the burgeoning e-cigs market. There is no doubt that mounting challenges in its traditional cigarette business could cause trouble for Altria down the road. However, the king of tobacco probably isn't going to go up in smoke just yet.

After all, Altria Group's stock has outperformed the market for years on end. Over the past five years, Altria's total shareholder return was more than 244%, compared to just 128% return for the S&P 500 during the same period. The company's shareholder friendly ways were on full display recently when Altria's board approved a $1 billion stock repurchase plan with a completion date of late 2015.

Altria's decision to finally invest in e-cigs and vapor products could help curb declining sales of traditional tobacco products, but it may only be a short-term stopgap.

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Tamara Rutter has no position in any stocks mentioned. The Motley Fool recommends CVS Health. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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