NJOY is thriving, but Altria needs more than steam before investors buy the stock

The stock of Altria (MO -1.07%) has risen more than 20% over the past year as investor sentiment around cigarette makers has generally improved. The biggest story for all the major companies in the space has been the growth of cigarette alternatives such as vaping products and pouches.

For Altria, after a failed investment in Juul, the hot story is the acquisition of NJOY. But don’t get too excited — here’s why.

Altria is failing and failing again

Before getting into NJOY, it’s worth looking back a bit. The continued decline in demand for cigarettes is nothing new, so Altria has known for years that it must find a replacement product if it hopes to grow over the long term. Closing the gap between cigarettes and some hoped-for alternatives were price increases, which largely offset volume declines.

Image source: Getty Images.

To put a number on the rate of decline, second-quarter 2024 cigarette volume fell 13% year-over-year for Altria. It is a huge and worrying figure and one that should not be overlooked. A consumer staples company with this kind of volume decline would normally be viewed quite negatively.

Altria didn’t ignore the volume decline, but it didn’t stand out in dealing with it either. He also bought a marijuana grower from vape maker Juul. Both investments declined and led to billions of dollars in write-offs.

Altria also split its foreign operations as Philip Morris Internationala company now entering the US market with non-combustible products such as bags. In essence, Altria has created a competitor. These are all material strategic missteps.

Altria buys NJOY and investors rejoice

Altria’s latest attempt at a new product was the acquisition of NJOY, another vape maker. To be fair, NJOY was more advanced in its product development than Juul. That suggests the potential for NJOY is better defined. And so far, Altria is doing a pretty good job with its new product. Management was happy to tell you about it.

In the second quarter, the company’s earnings release was supplemented with NJOY information. In fact, it was the first major topic discussed and for good reason. NJOY consumables shipment volume increased 14.7% sequentially, device shipment volume increased 80% sequentially, and US retail share increased 1.3 points sequentially to 5.5%.

To give credit where credit is due, Altria is doing well with NJOY. And in a way that his previous expansion efforts failed to match.

However, there is a problem here that investors should not overlook. NJOY currently falls under Altria’s “all other” segment. It’s not actually muted, so it’s hard to get a true read on what’s going on beyond the information that management is releasing. This is a problem because NJOY is supposed to help save the company from the decline of its cigarette business.

But the bigger issue here is that the “all other” category had just $22 million in revenue in the second quarter. Revenues from the smoking products division were $10.4 billion. Even the company’s oral products group tops “all others” with $1.3 billion in revenue.

There are two important takeaways here. First, NJOY works on a very small base, so the growth numbers look huge. Second, NJOY is still just a rounding error for Altria given the relative size of the rest of its business, especially cigarettes.

This good news must be put into perspective

It’s great that Altria is materially successful with its investment in NJOY. But even with the rapid growth of that business, it is still only a very small part of the overall operations. It will be a long time before NJOY can make up for the declines in the cigarette business, if that’s possible, let alone help the company expand.

Altria remains a company with a deeply troubled business and is only suitable for the most aggressive investors. This remains true despite the recent rise in share price and strong dividend yield of 7.5%.

Long-term dividend investors should be especially wary of Altria, given the continued and rapid declines in its most important business. Before you buy it, ask yourself if you would buy a company like Coca cola if demand for that company’s namesake product were down 13% year over year, with more declines on the horizon and a string of declines in the rearview mirror. The most likely answer is no.