How Altria Prepared for Failure

Altria (NYSE: MO) is a cigarette giant, its flagship brand Marlboro holds a whopping 42% share of the North American cigarette market and 59.4% share in the premium space. In many ways, the company is an industry leader. And yet, when you look at the numbers, you start to see that Altria is also lagging the industry. It’s Altria’s fault — here’s why.

Altria’s market position against its declining volumes

It’s pretty clear that Altria is a big player in the North American market. But there are some important caveats to consider here. For starters, the Marlboro brand accounted for about 89% of the company’s cigarette volume in the second quarter of 2024. So, for the most part, Altria is a one-trick pony. Not a good thing, even if that pony is, for now, very attractive.

The Marlboro brand saw volume decline 11.8% year over year in the second quarter of 2024. Volume fell 10.4% in the first half of the year. And Marlboro’s volume is down 8.8% in 2023. This isn’t a one-year problem for the tobacco company, it’s the continuation of a long-term trend.

To be fair, Marlboro is doing better than the company’s other brands. Weakness across the rest of its brand portfolio led to a 13% year-over-year volume decline in the company’s total tobacco business in the second quarter of 2024, down from 11.5% in the first half and a decrease of 9.9%. % in 2023. Again, this is just the continuation of a long-term trend.

There is no sign that this trend is slowing down, noting that the volume declines so far in 2024 are worse than the decline seen in 2023. Altria has offset the volume declines with price increases, which has allowed it to protect its earnings and support a growing dividend. But you can only raise prices so much before you reach a tipping point and price increases end up making the problem worse.

Altria sleeps in the bed she made

Altria is trying to find new ways to grow its business, most recently buying the vaping brand NJOY. Plugging that upstart’s product into his massive distribution and marketing network led to rapid growth at NJOY. That’s to be expected. But NJOY is still so small that it falls into what amounts to an “other” category on the income statement. It’s not even a rounding error, with the “other” category representing less than 0.2% of the company’s Q2 sales. The success Altria is seeing with NJOY is good news, but that still doesn’t make it especially financially significant.

The real problem here is that Altria set it up. And the volume of cigarettes again tells an important story. Competitor British American Tobacco reported a year-over-year cigarette volume decline of 6.9% in the second quarter. Philip Morris International (NYSE: PM) managed to increase its volume by 0.4% in the quarter.

The big difference between Altria and these two companies is that Altria only operates in North America. It is, quite clearly, the least desirable cigarette market. And that was management’s decision as it broke up Philip Morris International so it could focus on what is now the worst market for its most important product. Worse, Philip Morris International is now a key competitor in the non-cigarette business domestically. So not only did Altria choose to focus on the most difficult market, it also created a new competitor along the way. In retrospect, giving up international business seems like a big strategic mistake.

Altria’s list of mistakes is longer than spinoff Philip Morris International

If this were the only strategic mistake Altria made, you might be able to forgive the error. But the company also ended up writing off billions of dollars in sour investments in vape maker Juul and a marijuana company. Although NJOY seems to be doing relatively well, Altria’s history with major strategic efforts is not a good one. And it all goes back to the decision to break away from Philip Morris International, which helped put the company in the industry disadvantage it is now struggling to get out of. Long-term investors should tread carefully here; management’s track record is not very good.

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Reuben Gregg Brewer 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 British American Tobacco January 2026 $40 calls and short British American Tobacco January 2026 $40 calls. The Motley Fool has a disclosure policy.

How Altria Prepared for Failure was originally published by The Motley Fool