Tighter regulation a threat for Altria

US regulator the Food and Drug Administration (FDA) has long been tough on traditional cigarettes. Health warnings about cigarettes have encouraged some consumers to butt out. This, along with stricter regulations around the distribution and production of cigarettes, has prompted tobacco companies to explore other options, most commonly in the form of e-cigarettes or vaporisers, to get customers hooked on alternative products that they perceive to be healthier. 

However, while these products may indeed be healthier than traditional cigarettes, the FDA has been considering the effect these may have on consumers. One of the latest regulatory threats is the FDA’s investigation into whether there is a potential link between e-cigarette use and seizures. These threats of tighter regulation on alternatives is bad news for tobacco company Altria (US:MO), which has a 35 per cent stake in e-cigarette brand Juul. 

Analysts have suggested that if such developments continue, Altria may have to reduce its $12.8bn (£9.78bn) carrying value in Juul to reflect added business risks. Investors in Altria may wonder whether any disruption in progress with these alternative products will threaten Altria’s dividend policy, which aims to pay out around 80 per cent of adjusted EPS. The company paid $5.4bn in dividends in 2018, a 13 per cent increase on the $4.8bn paid in the previous year, at an annualised dividend of $3.20 a share. This represents a dividend yield of 5.7 per cent with cover of 1.23.

But compare 2018’s dividend payout with $8.39bn of cash generated from operating activities, and investors may wonder if such dividend increases can be sustainable over the long term, especially when there is a need to develop next-generation products to compensate for declining cigarette volumes. In 2018 Altria spent $12.8bn investing in Juul, making this the main driver of the $13bn net cash outflow from investing activities. This investment in Juul took place in July last year, so benefits of this transaction are yet to flow through.