Can NJOY Help Propel Altria Group Stock Higher?

Income-oriented investors tend to be attracted to Altria Group (NYSE: MO) due to its high yield of 8.6% and long history of increasing its dividend every year since 2009. However, revenue growth has been difficult to come by for the company, with sales down each of the past two years as well as the first quarter of this year.

That could be about to change, though, with more growth set to come from Altria's NJOY business following a recent positive announcement from the U.S. Food and Drug Administration (FDA).

Potential NJOY propelled growth

While the FDA is more known for taking a tough stand on tobacco products, especially any flavored products, Altria received good news recently when the government agency authorized the sale of four menthol e-cigarettes from NJOY. Two of the products --NJOY's ace pod menthol 2.4% and ace pod menthol 5% -- are refillable pod products that work with its ace vaping device. In addition, two disposable e-cigarette products, the NJOY daily menthol 4.5% and NJOY daily extra menthol 6%, were also authorized.

Altria acquired NJOY last year for $2.75 billion in cash plus the potential of $500 million in additional payments if certain products received FDA authorization. As a result of this decision, Altria will pay NJOY's previous owners an additional $250 million, with the final $250 million payment depending on the authorization of blueberry and watermelon-flavored pods that work with its ace 2.0 device. Given the scrutiny surrounding flavors that attract teens, authorization for these products seems less likely.

However, with NJOY now having the only FDA-authorized flavored vaping products on the market, it is in solid position to grow market share in the U.S. At the end of Q1, it only had a 4.3% market share for consumables and 11.5% for devices, so it has plenty of room to grow.

In addition, Altria is looking to increase the brand's distribution, and it recently rolled out its first retail trade program to give NJOY products more visibility at retailers. Distribution was increased to 80,000 outlets at the end of Q1, and the company will look to increase that to 100,000 outlets by the end of the year.

The one issue that Altria has run into with regard to NJOY is that illegal Chinese flavored vaping products, such as those made by Elf Bar, have continued to take market share in the U.S. despite being illicit products. These products often get into the country labeled as other items to avoid U.S. regulations and find their way into vape shops where they are sold illegally. Altria has been suing manufacturers, wholesalers, and retailers in an attempt to slow down the sales of the illegal products.

Right now, though, Altria has the only legal flavored vaping products on the U.S. market. And while that flavor is menthol, this should should drive growth.

Pack of cigarettes.

Is it time to buy Altria?

NJOY gives Altria the opportunity to return to some revenue growth, but even with slightly dwindling sales, the company still generates an enormous amount of cash flow. Last year, the company generated $9.3 billion in operating cash flow and $9.1 billion in free cash flow, which takes out capital expenditures (capex). That gave the company a strong dividend coverage ratio of 1.3 times its free cash flow, which demonstrates a high level of safety for the dividend and the ability to keep raising it in the years ahead.

Meanwhile the stock trades at a forward price-to-earnings (P/E) ratio of about 9 times, which is a very reasonable valuation. If NJOY is able to help kick-start some growth, that multiple could move higher.

MO PE Ratio (Forward)

Given its attractive yield, well-covered dividend, and low valuation, and the potential for NJOY to spark some revenue growth, Altria looks like a solid option for investors looking for a nice stream of dividend income that should continue to grow over the years.

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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.