Altria Group (MO) may have a better year than expected as it has increased its EPS range from $2.51-$2.56 to a range of $2.57-$2.62. Do not be surprised at this increase in earnings. One would think that the company has increased sales dramatically to present these figures, but that may not be the case.
The increase is due to a dispute about escrow payments from cigarette manufacturers dating back to 2003. Without getting into too much detail, the Master Settlement Agreement for tobacco companies will result in credits given back to them. As an example, Philip Morris USA Inc. will get a $45 million credit.
I'm not sure that the tobacco industry will grow a new customer base at this point as much as it will attempt to move smokers over to the smokeless tobacco market. Companies like Altria recognize this and have been putting their marketing dollars to use in these markets.
Smokeless Tobacco Market
The "smokeless product" sector represents about 21.7% of the value of Altria Group's stock (second only to the cigarette and cigar sector which adds 67.9% of the value of the stock). If the company is going to increase its revenue by sales, this is where it's going to have to focus in the future.
One area of the "smokeless product" market is smokeless tobacco. While cigarette consumption in the United States has continued to decline, tobacco companies have poured promotion dollars into this arena. Apparently, they have done it quite successfully because consumption of smokeless tobacco products continues to grow. This industry has been on the rise as it has been tracked since 2005. Take a look at some these sales statistics leading into 2011 and beyond:
- Sales of "moist snuff" overall, increased by 65.6%
- Sales of "pouched snuff" increased by 333.8%
- Sales of "flavored snuff" increased by 72.1%
- Both "pouched and flavored snuff" contributed 87.2% of the total growth to the moist snuff industry.
It appears the most popular demand of this category is a product called "Grizzly." This is a line from the American Snuff Company- which became a division of Reynolds America (RAI) when they acquired the company in 2006.
Who uses smokeless tobacco products?
The Federal Trade Commission, tracking tobacco marketing expenditures, states that from 1998 to 2011 the tobacco companies increased their marketing budget for smokeless tobacco by 210%. Considering the political push to dissuade people from smoking, this makes sense for the tobacco industry.
Data collected from 2011 showed that about 3.2% of the population over 12 years old used smokeless tobacco in the United States. That gives us a customer base of about 8.2 million people. Usage was greater among the young adult age group (18-25) where more than 5% used smokeless tobacco.
As I have stated earlier, smokeless tobacco products do not necessarily attract new customers to the tobacco company's base. Present tobacco users are starting to use smokeless tobacco products more and more. This is especially true among young people. Of the young people who use smokeless tobacco, 72% of them also smoke cigarettes while only 40% of them plan to quit smoking. From these findings, it appears that the tobacco companies are going to find (or already know) that the market for smokeless tobacco is going to come from the smoking community.
The journey to increasing smokeless tobacco revenue may find its base in the electronic cigarette. While other smokeless tobacco products continue to expand, none are growing as fast as this market which this year topped the $1 billion sales mark and is expected the top $3 billion by the end of 2015.
If the long generational battle to discourage smoking continues to chip away at the revenue base of tobacco companies like Altria, a "revenue substitute" needs to be defined. For these companies to continue to be the dependable dividend distributors as they have been for so many income investors, they are going to have to keep their revenue stream solid.
Over the long term the companies have already seen the writing on the wall. The smokeless tobacco industry from its snuff to its e-cigarettes (especially cigarettes) will be where companies encourage smokers to go.