Altria Faces Challenges in Moving Beyond Smoking

The Altria Group based in Henry County, United States, is promoting on its website that it is "going beyond smoking," despite the fact that its owner, Philip Morris USA, remains one of the world's largest producers of cigarettes and other tobacco products.

Currently, this company with 6,000 employees and a value of $26 billion may have to accelerate its efforts to phase out smoking faster than anticipated.

As part of President Biden's Cancer Moonshot plan, which aims to reduce cancer-related deaths in the United States by 50% over the next 25 years, the US Food and Drug Administration (FDA) has announced plans to restrict the nicotine content in cigarettes to "minimally or non-addictive" levels. The proposed rules are expected to be released in May 2023, with public feedback sought at that time. In addition, the FDA plans to ban the production of electronic cigarettes by Juul Labs Inc., which is 35% owned by Altria, headquartered in Washington, D.C. As of August, Juul's products remain on shelves despite FDA's decision in July to further review studies comparing e-cigarettes to traditional cigarettes, with no timeline for the process.

The potential for any future action to occur poses a challenge to Altria's long-term profitability and sustainability. In addition to federal government targets, Altria also faces other issues such as the US International Trade Commission's removal of Philip Morris' IQOS tobacco heating system from the US market in September 2021 due to patent disputes. Altria's $1.8 billion investment in Canadian cannabis company Cronos Group Inc. is unable to yield returns due to the lack of federal laws governing marijuana sales.

During a financial earnings call in late July, Billy Gifford, who was promoted from CFO to CEO of Altria in April 2020, acknowledged that it was a "critical point" for the tobacco industry in the United States. One month prior, The Wall Street Journal had referred to it as a "survival threat" particularly for large tobacco companies, including Altria.

During the release of their second quarter 2022 financial report in July, Altria reported a net income of $6.54 billion, a 5.7% decrease from the second quarter of 2021, closely in line with the company's projections for the year. Meanwhile, as of June 30th, Altria's $12.8 billion investment in e-cigarette company Juul, based in California, is under federal scrutiny (as well as facing numerous lawsuits) due to its appeal to underage tobacco users, causing its value to drop to $450 million.

According to Altria, if the e-cigarette manufacturer is banned from selling its e-cigarette products in the United States for one year or more, or if Altria holds no more than 10% of its initial investment, it may choose to terminate its non-compete agreement with Juul.

Altria has not yet sought to terminate its non-compete agreement because the company would also lose certain rights on the Juul board. "At this time, we still believe these investment rights are beneficial to us," said Altria spokesperson Jennifer Kelly via email. "Therefore, we currently do not have the option to waive our non-compete obligation, but we retain the right to do so in the future." Steve Marascia, an analyst at investment firm Capitol Securities Management in Richmond who holds stock in Altria, is keeping an eye on the company's progress and recommends a "buy" rating. He said the FDA's ban on Juul e-cigarettes and its mandate to lower nicotine levels would not pose a direct risk to Altria.

He said that Altria is still generating significant cash flow, allowing the company to continue paying dividends – a key area of interest for many investors who have witnessed Altria's consecutive 52-year dividend increases. "Dividends are crucial for stocks themselves, and maintaining the ability to pay dividends is also important for stocks.

However, ultimately, Altria will need to diversify away from cigarettes, noted Marascia. "Their options are either to seek out other products, make acquisitions, or possibly merge with another company.

At the beginning of the century, Altria was a more diversified company. Originally known as the Philip Morris Company, it changed its name in 2003 to the seemingly altruistic Altria Group, partly to distance itself from its tobacco business.

This follows years of negative news and lawsuits surrounding cancer deaths. In 1994, seven top American tobacco CEOs, including William Campbell of Philip Morris, testified before Congress that they did not believe nicotine was addictive. Four years later, Philip Morris and three other major tobacco manufacturers reached a settlement agreement, agreeing to settle state government lawsuits to recover tobacco-related health costs. Under the agreement, the four tobacco companies agreed to pay at least $206 billion to the 46 participating state governments, including Virginia, over 25 years.

In early 2007, Altria owned both Philip Morris USA and Philip Morris International, as well as an 88.1% stake in Kraft Foods. However, this did not last long. In March of 2007, Altria spun off the makers of Oreos and Oscar Mayer hot dogs as a separate stock, separating from Altria. In 1988, Altria acquired Kraft for $13.1 billion. Altria's investment in food began in 1985 when they acquired General Foods Corp., the manufacturer of products such as Tang beverages, Hostess snack cakes, and Maxwell House coffee.

However, Altria faced further legal challenges, including a federal lawsuit in 2006 brought against the company and co-defendants RJ Reynolds Tobacco Co. and Lorillard Tobacco Co. by Philip Morris USA, as well as a decline in tobacco sales. Despite this, Altria's efforts towards diversification continued over the following decade.

In 2008, as part of an ongoing restructuring process, Altria divested its overseas tobacco business, Philip Morris International, in order to separate PMI from the management of Altria's domestic cigarette business. At the same time, Altria relocated from its New York corporate headquarters to Henry County, where Philip Morris USA has established a base of operations.

The following year, Altria acquired UST Inc., the largest manufacturer of smokeless tobacco products such as snuff and chewing tobacco, as well as the Chateau Ste. Michelle wine brand. In 2021, Altria sold the brand to New York-based private equity firm Sycamore Partners for $1.2 billion in cash.

Currently, Altria's tobacco sales are primarily limited to the United States. In 2018, the company made two significant investments to strengthen its presence in the domestic marijuana and e-cigarette device markets. Altria has stated that it is committed to working with regulators and stakeholders to establish a regulated and legal marijuana market in the US, while the House and Senate are working on crafting unified policies.

Although Altria's $1.8 billion investment in Canadian company Cronos Group can be seen as a wise preparation for the future U.S. cannabis retail market, the tobacco manufacturer's $12.8 billion investment in Juul in 2018 is widely considered a massive mistake that quickly went south.

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