american tobacco company Altria Group (MO -1.36%), the rights holder of the Marlboro cigarette brand in the United States, recently announced an agreement to acquire e-cigarette maker NJOY Holdings for $2.75 billion in cash. Investors familiar with Altria might grumble; it looks like Altria is taking another turn in a multi-billion dollar acquisition after spending billions on its infamous Juul investment.
But there are not as many risks this time. Altria is undoubtedly paying a high price for what it is getting, but the acquisition could make much more sense in the long run considering the circumstances of the deal. Here’s what matters to shareholders.
NJOY got what Juul couldn’t
It is well known that smoking cigarettes is a fading habit in the United States. Just take a look at Altria’s annual reports and you will see that cigarette shipment volumes are decreasing every year. As price increases pushed Altria’s earnings up over the years, the company also began to look for long-term business opportunities outside of smokable products. E-cigarette company Juul was supposed to be that, but regulators have regularly derailed Juul’s business.
NJOY is the only pod-based e-cigarette product with Premarket Tobacco Application (PMTA) approval from the Food and Drug Administration (FDA). This means Altria can legally market and sell NJOY’s approved products in the US market. NJOY has several endorsements, including devices and tobacco flavored pods in different nicotine levels.
Investors can think of NJOY as Altria’s rapid move into America’s vaping market. The e-cigarette landscape has become increasingly competitive; British American TobaccoVuse’s device has a pending PMTA and a former partner turned competitor Philip Morris International plans to launch its products in the US market next year. Altria felt they needed a market-ready product as soon as possible.
The 8% yield dividend is going nowhere
A large acquisition may raise eyebrows for those worried about a dividend cut. But don’t be afraid; the dividend is unlikely to go anywhere. Altria has $4 billion in cash and will write a check for NJOY. Additionally, Altria will receive $1.7 billion from Philip Morris International in July as part of their breakup with Iqos.
This is expected to be a lot of money to manage the acquisition and does not take into account future cash flows from Altria’s core business. Annual free cash flow of approximately $8 billion less $6.5 billion in dividends paid leaves an additional $1.5 billion in new cash by the end of the year. Management reiterated the company’s current $1 billion share buyback program, underscoring confidence in the balance sheet. Dividend investors don’t have much to worry about until something changes.
The electronic market could move the needle
Why is Altria still suing the e-cigarette market after wasting billions on Juul? Because the US vaping market could still fuel long-term growth. Management estimates that vaping in the United States has reached 15% of total tobacco volume, with a user base of 13.7 million users making $7 billion in annual sales.
A study by Grand View Research estimates that the global electronic cigarette market could grow by an average of 30% per year until 2030. The United States has traditionally been one of the most lucrative markets for nicotine products. due to the country’s high disposable income. PMTA regulatory hurdles have created a potential race for market share, which could fuel further revenue growth if Altria can grab a meaningful slice of it.
Will it happen? It certainly could; NJOY has an estimated 3% retail share of vaping in the United States. Altria will roll out the product to its more than 200,000 outlets across the country, where Marlboro has premium stocking space. This acquisition is not something to buy or sell the shares on Todaybut it could make a big difference for investors down the road.
Justin Pope 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 Calls of $40 in January 2024 on British American Tobacco Plc and Short Buys of $40 in January 2024 on British American Tobacco Plc The Motley Fool has a disclosure policy.