MO Money: Why Altria Group shares are rallying

Altria charts a new course to regain financial health Altria will have to rely on its legacy cigarette business for some time Altria stock will continue to be moved by Juul-related headlines Altria Group, Inc. (NYSE: MO)

staged a mini rally last week that was eventually snuffed out by Friday's market selloff, the fourth consecutive selloff to new 2022 lows nonetheless.

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Yet with the tobacco leader outperforming the S&P 500 by 10% year-to-date, the defensive nature of the stock at least helps investors to limit their losses. A recently increased quarterly dividend of $0.94 certainly helps in this regard.

Most importantly, Altria's quest to reinvent itself in a time when health and wellness trends are on the rise and declining smoking appears to be gaining traction. It certainly must.

According to the Center for Disease Control & Prevention (CDC), approximately 12.5% ​​of American adults smoke cigarettes. Although still a concern, it marks a significant drop from 2005, when the smoking rate was estimated at around 21%. Good news for the overall health of Americans, but not so good news for the tobacco industry.

With cigarette smoking on the decline and alternatives like vaping popular, Altria is charting a new path to financial health. Butt (pun intended) does it work?

What is Altria's strategy to combat the decline in smoking?

By the end of the decade, Altria's vision is to lead smokers to "a smoke-free future". The tobacco industry's equivalent of switching from gasoline-powered to electric vehicles, it's a hugely ambitious mission with a long way to go.

What Altria has right is that adult smokers are looking for different options that reduce the risk of disease and death associated with tobacco products. To the company's credit, she created a smoking cessation program called QuitAssist. But of course he wants to make money, so developing and investing in new products is the main goal.

Creating a smoke-free product portfolio is the path of choice for Altria. Rather than going tobacco-free (and battling nicotine addiction), it's rolling out a growing line of smokeless tobacco (think: chewing tobacco brands like Skoal), nicotine pouches via the On! brand, and the controversial IQOS heated tobacco. IQOS, the only FDA-cleared heated tobacco system with its flagship Marlboro HeatStick line, has come under intense scrutiny from regulators and health groups

How dependent is Altria on cigarette sales?

While this strategy materializes, Altria will need to rely on its former cigarette business for some time. Currently, sales volumes are down with fewer people turning to smoke compared to the stress-filled pandemic period of 2021. On the positive side, Altria has pricing power that allows it to raise prices for boxes to help compensate for the lack of demand.

Despite the push into oral tobacco, the company's smoking products segment still accounts for about 90% of revenue. Smokeable's revenue managed to grow 2% in the second quarter on price increases as it held 48% retail market share. Ironically, Altria's growth priority, Oral Tobacco, saw sales decline by 4%.

The good news from a shareholder perspective came a month later when the board announced a 4.4% increase in the dividend. This maintained Altria's 12-year dividend-increasing streak and increased the forward yield to nearly 9%. This brought new attention to the stock from income investors willing to wait out the long-term growth strategy and collect dividends.

In addition to smokeless tobacco, Altria is moving into the world of alternative drinks to diversify away from its Philip Morris cigarette business. It holds minority stakes in Anheuser-Busch InBev and Cronos Group in an effort to gain exposure to