For decades, Philip Morris was a dividend investors dream. A stable company that would increase its dividend annually. Then tobacco lawsuits began to pop up and the company decided to split itself up for the long term health of the company. So in 2003, Altria (NYSE: MO) was born.
Since the spin off, Altria stock has done well and it has continued the trend of annual dividend increases. But last month, word came from the Food And Drug Administration (FDA) that it is going to start requiring tobacco companies reduce the amount of nicotine in their cigarettes.
As a result, the stock price plummeted by 13%. As we all know, investors tend to overreact to both good and bad news. So in this case, did investors overreact and is now a great chance to buy Altria while on sale?
The Future Of Altria
Before we can definitively say whether Altria is buy, we need to better understand what the future holds. First we need to look at the lowering of nicotine in cigarettes.
According to the National Institute of Health, a typical cigarette contains between 10 to 15 milligrams of nicotine. The average smoker ingests roughly 1 to 2 milligrams of nicotine per cigarette.
In order to lower the amount of nicotine so that it is non-addictive, the National Institute of Health estimates that 0.5 milligrams is the limit of how much nicotine can be in a cigarette. This number however is not uniform as different people ingest different amounts of nicotine based on various factors.
Just understanding that is a major red flag for the future of tobacco companies. But we have to remember they also offer other products as well, namely e-cigarettes.
Before last month, the future for e-cigarettes also looked dim. But the FDA changed its mind regarding the date for FDA approvals and is allowing tobacco companies until 2022 to provide information for FDA approval.
Altria has an inside track on this market as Philip Morris has already submitted an application to the FDA to have its iQOS device labeled as “reduced risk”. If approved, it will be a huge hurdle that the company has overcome.
