Dividend Momentum And Regulatory Clarity Will Drive Further Gains Through 2025

Key Takeaways

• Market challenges from illicit e-vapor products and synthetic nicotine competition could hinder revenue growth and impact market share in key segments.
  
• Economic pressures and regulatory challenges may compress net margins due to the need for price strategy adjustments and increased operational costs.
  
• Altria leverages strong tobacco margins, growing oral products, strategic marketing, and e-vapor initiatives to drive stable earnings and shareholder value amidst market challenges.

Catalysts

Through its subsidiaries, manufactures and sells smokeable and oral tobacco products in the United States.

• Altria faces challenges in the e-vapor category due to the prevalence of illicit products, which constitute over 60% of the market. This limits their ability to generate revenue from legitimate e-vapor products, impacting future revenue growth.
  
• Economic pressures on consumers, including inflation and macroeconomic factors, affect purchasing decisions, causing a shift towards discount products. This could lead to compressed net margins as Altria may need to adjust pricing strategies to maintain market share.
  
• The reduced shipment volume and market share for NJOY due to ITC's exclusion order highlight operational risks and potential revenue loss from regulatory challenges, impacting future earnings.
  
• The competitive environment in the oral tobacco category, particularly with synthetic nicotine products entering the market, could pressure Altria's market share and revenue growth in this segment.
  
• Tariffs on imports from China, including disposable vapes, and potential costs associated with compliance and enforcement may increase operational costs, impacting net margins if price adjustments are not feasible.

Altria Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Altria Group's revenue will decrease by 0.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 50.3% today to 44.8% in 3 years time.
• Analysts expect earnings to reach $9.1 billion (and earnings per share of $5.54) by about July 2028, down from $10.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.9x on those 2028 earnings, up from 9.8x today. This future PE is lower than the current PE for the US Tobacco industry at 21.5x.
• Analysts expect the number of shares outstanding to decline by 1.28% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.42%, as per the Simply Wall St company report.

Altria Group Future Earnings Per Share Growth

Risks

• Altria's highly profitable traditional tobacco businesses have shown strong performance, particularly with robust net price realization in the Smokeable Products segment, indicating stable revenue and margins despite volume declines.
  
• The Oral Tobacco Products segment, especially the brand on!, has demonstrated significant growth in shipment volume and retail share in a competitive environment, suggesting a potential increase in revenue and maintaining strong margins.
  
• Altria's investments in brand equity and marketing initiatives like the It's On! campaign have increased consumer awareness and impressions significantly, which could positively impact future sales and earnings.
  
• The company's strategic approach to e-vapor includes developing a diverse portfolio of products, leveraging the NJOY acquisition to stay competitive and potentially enhance future earnings as the market becomes more regulated.
  
• Altria's financial strength is underscored by its commitment to returning value to shareholders through dividends and share repurchases, as well as maintaining a strong balance sheet, which supports stable earnings and financial flexibility.

Valuation

• The analysts have a consensus price target of $58.538 for Altria Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $73.0, and the most bearish reporting a price target of just $49.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $20.3 billion, earnings will come to $9.1 billion, and it would be trading on a PE ratio of 12.9x, assuming you use a discount rate of 7.4%.
• Given the current share price of $59.36, the analyst price target of $58.54 is 1.4% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.