Altria: Don't Fear The Specter Of Lower Nicotine Levels In Cigarettes
Apr. 20, 2021 10:49 AM
Daniel Thurecht
5.97K Followers
Long-Term Horizon, Contrarian, Oil & Gas, Industrials
Contributor Since 2016
I primarily provide coverage of high-yielding income investment opportunities with a heavy focus on fundamental financial analysis, which I feel ultimately determines whether the investors receive a handsome income or face a painful disappointment.
My goal is to help my fellow investors separate desirable income investments from those that are likely to lose them money. This means not only highlighting desirable investments but also the ones to avoid since losses can easily weigh down otherwise stellar returns.
I have been actively investing as well as engaged in associated financial activities for approximately one decade. Academically I have obtained a Bachelor degree majoring in Finance, minoring in Accounting with Honours IIA.
Summary
It feels rather like déjà vu with the share price of Altria dropping around 6% following news that the Biden Administration is considering regulating lower nicotine levels in cigarettes.
The idea behind this possible policy is to reduce the nicotine content in cigarettes to non-addictive levels, thereby helping to further lower smoking rates.
This poses no material short-term implications since there is no date set and not to mention that it would take years to have its intended impacts.
When looking into the long term, they have already unveiled their "moving beyond smoking" strategy and given their historically strong earnings, they should have the capital to build out these new ventures.
Since this policy would not be a silver bullet for stopping smoking and thus still give them time to continue diversifying away from cigarettes, I will be continuing my very bullish rating.
Quitting smoking
Photo by Pixelimage/iStock via Getty Images
Introduction
It feels like a degree of déjà vu upon once again seeing prospects of lower nicotine levels in cigarettes returning to the front of the news for the United States tobacco industry, which saw the share price of the cigarette giant Altria (MO) initially drop around 6%. Whilst this could sound rather troublesome on the surface, thankfully when digging deeper, it appears that they are well-positioned to traverse this resurgent risk.
Background
It can be amazing in retrospect how quickly time passes with it being almost four years since the specter of regulated lower nicotine levels in cigarettes first began striking fear into the hearts of investors. At the time, this news sent their share price plunging by near-record double-digit percentages during a single trading session as investors ran for the exits over fears that the domestic tobacco industry was about to be decimated. Fast forwards until now in early 2021 and the elected Biden administration is considering regulating nicotine levels to a point whereby cigarettes are no longer classified as addictive to help continue the trend of declining smoking rates, as the graph included below displays.
United States smoking rates
Image Source: American Lung Association.
The Short-Term Implications
The implications of any regulated lower nicotine levels will be essentially non-existent in the short term for multiple reasons with the first and most obvious being that the Biden administration is only currently considering taking such an action. This evidently means that no date has been set and there would naturally be a run-up time frame to allow for its implementation, not to mention that the tobacco industry could likely tie the matter up with court cases for years
Even if we completely forget about these logistical realities and assume that all of a sudden cigarettes have non-addictive levels of nicotine starting 1st May 2021, it will still not see an instant plunge in cigarette sales. Smokers will not simply just wake up in the morning and completely cease smoking even if the policy has its intended impacts, as it merely makes it easier for people to quit over a length of time whilst also making it less likely for others to become addicted themselves.
When considering these variables, it seems that the only implication in the short term would be higher legal costs if they were to fight any new nicotine regulation in court, and whilst lawyers are not cheap, a few million dollars a year is nothing when your revenue is over $26b per annum. Even though there are no reasons to be concerned in the short term, obviously the value of an investment is the present value of its aggregated future earnings and thus the long-term implications are far more important.
The Long-Term Implications
When casting an eye out into the long term, the possible implications of such a regulation start becoming more meaningful, but thankfully, they still have ample ability to navigate and survive such a change. Assuming this potential regulation has its intended effect, then naturally, smoking rates would start decreasing faster than would have otherwise been the case in a business-as-usual scenario. It could also impact the price inelasticity of their demand and thus make it difficult to continue mitigating lower volumes with higher prices since it would be harder to pass along price increases on a non-addictive product.
Thankfully, management is not simply sitting around and hoping that these long-term risks magically disappear with them recently discussing their "moving beyond smoking" strategy at length during their 2021 CAGNY Investor Presentation. Apart from their various other general environmental and social initiatives, this strategy sees them focusing on growing their lower-risk non-combustible product offerings, such as IQOS and Marlboro HeatSticks. This strategy will naturally require time not only to build their non-cigarette earnings but also capital to invest in growing these other business segments, but thankfully, they have historically performed very well even in the face of difficult operating conditions, as the graph included below displays.
Altria cigarette earnings
Image Source: Altria 2021 CAGNY Investor Presentation (previously linked).
Since they have grown their earnings by a compounded average growth rate of 5.50% between 2015 and 2020 despite seeing cigarette volume declines, it stands to reason that their earnings should not suddenly plunge even if lower nicotine levels result in larger volume declines. It would be much more likely to first see their earnings flatline before beginning to decline modestly year-on-year, because once again, lower nicotine levels are not a magic bullet to suddenly cease smoking but rather a long-term initiative. This means that despite sounding rather scary, they should still have sufficient capital to continue investing elsewhere in order to diversify away from cigarettes and thus continue providing their generous shareholder returns.
A final point of view based on my anecdotal life experience as a lifetime non-smoker, without the fear of becoming addicted to cigarettes, they are significantly less scary to try on occasion out of nothing but pure curiosity. Whilst the negative health implications are always going to remain as a deterrent for heavy usage, I feel that the prospect of becoming easily addicted is the bigger deterrent when it comes to occasional usage. Given this personal opinion, I would not be surprised if lower nicotine levels were to foresee an increase in occasional usage that could partly mitigate the loss of heavy usage. Whether this ever transpires is naturally unknown but government policies can easily have unintended side effects.
Conclusion
At the end of the day, it should be remembered that cigarette volumes are already in a secular decline, and thus, even if nicotine is regulated to non-addictive levels, it only expedites their future as clinging onto cigarettes was never going to last forever. Since they still offer a high dividend yield of 7% and management has already started implementing their "moving beyond smoking" strategy, I believe that maintaining my very bullish rating as the specter of lower nicotine levels is not as scary as it initially seems.
This article was written by
Daniel Thurecht profile picture.
Daniel Thurecht
5.97K Followers
I primarily provide coverage of high-yielding income investment opportunities with a heavy focus on fundame...
Long-Term Horizon, Contrarian, Oil & Gas, Industrials
Contributor Since 2016
I primarily provide coverage of high-yielding income investment opportunities with a heavy focus on fundamental financial analysis, which I feel ultimately determines whether the investors receive a handsome income or face a painful disappointment.
My goal is to help my fellow investors separate desirable income investments from those that are likely to lose them money. This means not only highlighting desirable investments but also the ones to avoid since losses can easily weigh down otherwise stellar returns.
I have been actively investing as well as engaged in associated financial activities for approximately one decade. Academically I have obtained a Bachelor degree majoring in Finance, minoring in Accounting with Honours IIA.
Disclosure: I am/we are long MO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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Comments (216)
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LENRICCIO
Today, 10:47 AM
Comments (227)
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Until Biden's group puts something on the table then we all are just speculating the future. One piece that few are mentioning is deals with menthol flavoring. Menthol flavoring and not nicotine was the petition filed with the FDA. Black male smokers were 85% more likely to use menthol cigarettes compared to up 20% of white male smokers. So the petitioner say the tabacco industry is using menthol to target blacks and is racist.
And before the FDA takes any action to reduce the nicotine in cigarettes they must present clear scientific support for their action and not just the goal of getting people off cigarettes. And if it goes to court and the FDA does not have indisputable scientific data to support their case for lowering nicotine they will lose their court battle.
Now on a political note. Everything that Joe B does or more likely his team is political. Knowing that North Carolina and Virginia employ many people in the tabacco industry and to try to directly kill their livelihood is a risky venture for the Democrats to hold two key swing states in future elections. Not sure what the political gain would be to just reduce nicotine. His best bet would be to kick off a multi year study that will give his universities big dollars to come up with clear options for addressing cigarette smoking. Kick the can down the road Joe.....
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Toni Nikkanen
Today, 12:36 PM
Comments (859)
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@LENRICCIO it is already known anyway that banning menthol doesn't reduce cigarette sales. At least it didn't in Canada or Germany where it has been banned for a few years. But doing the act of banning may be good window dressing...
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InvestorMan Sr.
Today, 1:10 PM
Comments (2.2K)
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@LENRICCIO Both NC and VA are heavily trending Democrat. I would guess most tobacco workers in those states already lean GOP. I suspect the Dems see more benefit by cementing their pro government regulating, big nanny state bona fides with their base in those states vs. further alienating some voters who already trend away from them any way.
I don't see much coming out of this proposal and see this as a dip and buying opportunity for tobacco stocks.
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Ashdove
Today, 9:58 AM
Comments (32)
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It is tantamount to limiting the size of gas tanks in cars, under the pretense of reducing global warning and car accidents. Woke thinking has struck again.
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BMC-USA
Today, 8:47 AM
Comments (185)
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Radical left government getting involved in the operations of private businesses and the individual right to choose. What a shocker!
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AlphaElephant
Today, 8:54 AM
Comments (1.19K)
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@BMC-USA stop pushing your personal biases. This was originally proposed by Trump administration. Facts matter.
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100centsofadollar
Today, 9:44 AM
Comments (249)
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@BMC-USA Can I assume you favor legalizing heroin? As we know there are plenty of people who choose to use that product.
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okeeffej
Today, 10:11 AM
Comments (79)
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@100centsofadollar I would support legalizing it, and regulating it like alcohol.
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Car Buyer
Today, 8:31 AM
Comments (632)
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Lower nicotine levels might mean more smoking to get the same level of nicotine in the bloodstream and lungs.
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DrivingProfits
Today, 11:01 AM
Premium
Marketplace
Comments (137)
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@Car Buyer Yes, it's not like getting your nicotine fix from a patch is an option or anything.
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Fangorn
Today, 4:52 AM
Comments (401)
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Spot on article.
Tempted to nibble some more on this dip - but might give it a day or two to see if there is any further weakness sentiment wise.
Cheers for the article.
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KIA Investment Research
Today, 1:41 AM
Premium
Comments (21.4K)
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Reducing nicotine levels will only increase cigarettes consumed (to achieve the needed "hi"). This is worse for the smoker.
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Mister Doom
Today, 1:22 AM
Comments (628)
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I was with you until the most over used phrase..” at the end of the day”
Stop saying that,,,how about thoughts and prayers?
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clam
Today, 12:56 AM
Comments (6)
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If tobacco is no longer addictive and unhealthy, how will government justify the $12 billion in taxes it levies on the consumer. They’re not likely to kill that cash cow!
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M. Mazz
Today, 10:50 AM
Comments (21)
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@clam Cigarettes cost the taxpayer more than that in healthcare.
Like
Cloudchaser
Today, 12:46 PM
Premium
Comments (1)
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@M. Mazz Not necessarily true - early deaths resulting from smoking save in social security and medicare costs. This per George Will many years ago, so unverified, but seems reasonable to assume.
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InvestorMan Sr.
Today, 1:12 PM
Comments (2.2K)
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@M. Mazz However, the savings from reduced smoking healthcare costs takes years (decades)to materialize. Plus, everyone dies eventually and healthcare costs are incurred regardless of what one may be suffering from. In the end, the cost of end of life healthcare is inevitable regardless. Getting old is the biggest contributor to healthcare costs.
Loss of tobacco tax revenues, on the other hand, is much more immediate.
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GETRICHSLOW2
Yesterday, 11:45 PM
Comments (271)
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This is as stupid as Bloomerberg trying to tell you what size fountain drink you can buy.
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Eileen Dover
Today, 12:47 AM
Comments (1.76K)
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@GETRICHSLOW2 You are correct. You should be allowed to smoke or drink as much soda as you want without the government telling you it is bad for you. The same should go for hard liquor, and all other vices. lol
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BMC-USA
Today, 8:48 AM
Comments (185)
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@Eileen Dover yes, but then when a mild cold virus like covid comes around and you’re suspectible to it cause you’re obese and unhealthy don’t demand everyone wear a useless mask so you feel “safe”
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100centsofadollar
Today, 9:56 AM
Comments (249)
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@BMC-USA There are websites to discuss Covid, there are websites to discuss Sean Hannity and there are websites to discuss investments. This is the latter. Perhaps you got lost but it's awfully rude to force everyone to deal with your issues.
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hdwrddyo
Yesterday, 10:10 PM
Comments (61)
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Less nicotine per smoke = More sales
Like
ckarabin
Yesterday, 9:56 PM
Marketplace
Comments (16.07K)
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I don't smoke and never have. But I would think such a change would really irritate a LOT of smokers to the point they would turn on the Democratic party for interfering in their lives. One wonders why the Demcorats would like to hack off still another big part of the population when there is an election every 2 years. They already risk losing one helluva lot of energy workers' votes, everyone that will soon be paying $4 per barrel for gasoline, millions of people who will have to spend the money to switch from nat gas to electric heat at great cost, anyone with an electric bill to pay and soon most people affiliated with the housing industry when mortgage rates skyrocket off the $2-3 trillion deficits. The list grows daily!
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Total Returns
Yesterday, 10:11 PM
Premium
Comments (591)
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@ckarabin $4 per barrel is an excellent price don't know what you are complaining about. I pay more than half that for a single gallon!
And please stop blaming Biden for high gas prices...for the love of God its a global commodity controlled by a frigging cartel. Yes Biden doesn't like oil and canceled keystone...has literally nothing to do with what you pay today for oil/gas.
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Eileen Dover
Yesterday, 11:30 PM
Comments (1.76K)
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@ckarabin If Biden had been President in Jan 2020 he would have listened to his scientists and we would not be in the mess we might be in for another year or so. Not just Biden, maybe anyone else would have done something rather than nothing other than watching themselves on the news, eating Big Macs, and drinking a dozen Diet Cokes a day.
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BMC-USA
Today, 8:48 AM
Comments (185)
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@ckarabin because we no longer have legitimate elections
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Snpman
Yesterday, 8:35 PM
Comments (22)
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So restricting nicotine levels is going to create a black market in real nicotine cigarettes. Now that pot is legal, government has to create a weed replacement.
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SilverisREALMoney
Yesterday, 7:39 PM
Comments (158)
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Limiting nicotine is just a way for Altria (MO) or British Tobacco (BTI) to sell you TWICE AS MANY PACKS OF CIGARETTES. If anything, this policy initiative by Biden will augur higher sales for cigarette companies. It's not like a current smoker is going to quit b/c they are only getting 3mg of nicotine per cigarette when they were used to 5mg or 6mg, THEY WILL JUST OFFSET THE LOWER NICOTINE WITH MORE CIGS SMOKED... Long (BTI) and (MO)
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It's Sausage Time
Yesterday, 8:24 PM
Comments (1.36K)
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@SilverisREALMoney One hopes so
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Car Buyer
Today, 8:35 AM
Comments (632)
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Collateral damage: health care issues due to double the cigarette smoking.
Like
okeeffej
Today, 10:13 AM
Comments (79)
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@SilverisREALMoney I've been smoking 32 years. I'll just be pulling the filter off.
Like
FED Crooks
Yesterday, 7:31 PM
Comments (43)
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Less nicotine means you need to smoke more - bullish!
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falconetti aanthony
Yesterday, 7:30 PM
Comments (1.56K)
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lower the price of cigarettes, lower nicotin levels..= more cigarettes sold...MO can make a cigarette for about .02..lots of ways to keep profits up..plenty..and plenty of other things to invest MO money in to keep earnings up.
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Eileen Dover
Yesterday, 8:20 PM
Comments (1.76K)
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@falconetti aanthony Drop nicotine content 50%, drop prices 40% or less, more profit for MO. More sales means more taxes for Gov't and need for more workers increases tax revenue as well.
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Sugar Charlie
Yesterday, 7:12 PM
Comments (1.5K)
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Tobacco investing is inherently risky, After the old Philip Morris had recovered from the Engle judgment, I sold 2/3 of my position, which had over many years become too large and too risky for my portfolio. But I retain positions in MO and PM, and have been patiently or impatiently watching MO grind slow;ly back to its old highs. I think that proposals to limit nicotine content (and to outlaw menthol products) do involve risks to earnings. Altria is well equipped to become a dominant player in cannabis, but so far I have not seen signs of any adequate progress in that direction, to offset issues with tobacco.
Like
Skyfall7
Yesterday, 7:17 PM
Premium
Comments (668)
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@Sugar Charlie tobacco, airlines, oil, tech, financial. Umm where to go?
Like
Merc3
Yesterday, 6:56 PM
Comments (63)
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Time to buy the dips. Thank you overacting "investors." LONG MO
Like
RayRay1000
Yesterday, 6:50 PM
Comments (22)
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Heads MO wins, tails......MO wins again.
Like
Buyandhold 2012
Yesterday, 6:32 PM
Marketplace
Comments (30.18K)
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These politicians.
Something is wrong with them.
Always picking on the tobacco companies.
They don't know where their bread is buttered.
Instead of picking on the tobacco companies, if they had invested taxpayer money in Altria beginning in 1925, there would not be a national debt.
A $1,000 investment in Altria in 1925 with dividend reinvestment is now worth about 250 million dollars.
Don't you wish that you had invested $1,000 in Altria in 1925?
A $10,000 investment in Altria in April of 1985 with dividend reinvestment is now worth $3,397,387. CAGR 17.48%.
The forward P/E of Altria is 11.43.
Altria's yield is 7.01%.
You really can't go wrong investing in Altria, especially if you buy it during substantial dips because when you invest in Altria you'll be singing all the way to the bank.
"It's raining dividend checks
Hallelujah
It's raining dividend checks
Amen
God bless Big Tobacco
She opened her checkbook
And she sent me great big dividend checks
And when I hold those big checks in my hand
I say hallelujah because bigger is always better.
Amen."
Like
barbados665
Yesterday, 8:39 PM
Comments (51)
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@Buyandhold 2012 FOMO made me buy 125 shares last week and I have the cash ready (no margin) to buy 100 shares tomorrow to buy the dip. Not much longer till I have 2000 shares.
Like
Louverture
Today, 1:49 PM
Comments (1.96K)
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@Buyandhold 2012 Gotta love it. Mo money, MO money:)
Like
Skyfall7
Yesterday, 6:02 PM
Premium
Comments (668)
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Mixing it with pot lowers it. :-)
Like
Bim Ska La Bim
Today, 6:36 AM
Comments (1.94K)
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@Skyfall7 ... LOL... well, yeah
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