Altria (NYSE:MO) reported earnings on Thursday that beat analyst expectations, but the tobacco giant was hit with a one-two punch on its next-generation products portfolio. Shares of MO ended down 2% for the day as the market also thought its outlook for 2025 was lackluster.

Yet Altria still leads the cigarette market by a wide margin, its profits are solid, and its dividend that yields 8% annually remains secure. Having raised the payout for 55 consecutive years, should investors add this Dividend King to their portfolio?

Patent violation deja vu

Revenue of $5.27 billion dollars in the fourth quarter was virtually unchanged from the year-ago period while adjusted earnings per share grew 3% to $5.12 per share, both slightly ahead of Wall Street’s forecasts.

Yet the stock still fell as a ruling by the U.S. International Trade Commission held Altria’s NJOY vapes violated four patents by its former partner Juul Labs, which could result in the device being removed from store shelves. It’s a shame because NJOY volumes were up sharply in the quarter, rising 22% for devices and 15% for consumables.

It’s the second time a device Altria was selling suffered a patent infringement loss at the hands of the ITC. In 2021, the body determined Philip Morris (NYSE:PM) iQOS heated tobacco device violated patents held by British American Tobacco‘s (NYSE:BTI) Vuse electronic cigarette. The device was pulled from the market and MO’s partnership with PM collapsed.

No joy in NJOY

NJOY was Altria’s way to get back into the electronic cigarette market after its investment in Juul went up in smoke following the Food & Drug Administration targeting it as the cause for the rise in teen vaping. Once the industry leader with a 75% market share, Juul’s share collapsed to 28% by 2023 and it stopped selling its original device. The Juul 2 was subsequently introduced.

BTI is the industry leader today with a better than 50% share in the U.S. NJOY is a distant third at just 5.5%.

While Altria might be able to reach a settlement with Juul or develop design considerations that allow NJOY to stay on the shelf, the real problem is with the flood of illegal vape devices that dominate the market. 

According to anti-smoking, anti-vaping group Truth Initiative, illegal vapes own the market with an 86% share whereas all legal vapes combined hold the remaining 14%. There is just a handful of vapes that have won marketing approval from the FDA to sell vapes, yet the agency has done little to combat the influx of illegal devices, which are mostly from China.

While the combination of the ITC ruling and illegal vapes weighs on Altria’s ability to break into the next-gen nicotine market in any substantial way, it also means NJOY is not critical to its current performance. 

Unfortunately, it also means NJOY likely won’t be a major contributor to its future goals either.

Profitable above all else

However, Altria remains a solid company. Despite smoking being in a secular decline, Altria’s Marlboro is still the dominant cigarette with a 41% share of the market. In the premium segment, the Marlboro Man still rides tall with a 59% share.

Still, total cigarette volumes fell nearly 9%, which also weighed on MO stock, but it was able to make up for it by raising prices. Altria commands significant pricing power and it is able to raise prices as input costs or excise taxes rise. It is why the tobacco company remains so profitable.

Operating income for the quarter of $2.9 billion was up 3% over last year. Guidance, though, failed to impress as Altria forecast adjusted EPS would grow 2% to 5%, reaching $5.22 to $5.37 per share, which, at the midpoint, is just under the analyst consensus of $5.35 per share.

Key takeaway

The market seems to be assigning too much emphasis on the NJOY ruling, which opens an opportunity for investors. The stock trades at 8 times earnings and less than 10 times next year’s estimates and goes for a bargain-basement 10 times the free cash flow it produces.

With management announcing a $1 billion share buyback program, strong pricing power, and a very profitable business, Altria remains dividend royalty that should be part of an income investor’s portfolio.

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