On Monday the U.S. tobacco giant Altria Group Inc. (MO, Financial) informed the market that it will acquire an 80% interest in certain companies of the Swiss group Burger Söhne Holding for a total consideration of $372 million.
These companies globally market oral tobacco-derived nicotine pouches under the On! trade name. The deal is expected to be completed in the second part of the current year.
"This acquisition will add another non-combustible product to our portfolio in what we believe is a high-potential, rapidly-developing oral TDN products (tobacco-derived nicotine) category," CEO Howard Willard said in a statement.
Following the news, the share price may head higher in the coming weeks as the portfolio of non-combustible products gives a significant contribution to the revenue and operating income of Altria.
In the first quarter of 2019, the smokeless business segment added 12% to the net revenue of $4.39 billion and was 15.5% of the adjusted operating income of $2.37 billion of Altria Group.
The smokeless tobacco business is expanding as shown by the following information.
Altria Group said that according to IRI - a Chicago-based market research company - in 2018 sales of TDN products grew 250% from 2017 and that about 26 million adult consumers of tobacco in the U.S. are interested in products that involve a lower health risk than combustable products.
This transaction is part of Altria's strategy to diversify its portfolio of activities in three business segments: smokeable, smokeless and winery. The existence of other activities besides the sale of cigarettes and cigars, which constitutes the core of the company's operations, represents the long-term catalyst.
An increasing number of people are reducing their consumption of combustible tobacco products, and others are quitting smoking as a response to mounting campaigns against tobacco and due to fears about negative effects on health.
The demand for tobacco is falling, and higher pricing enables Altria to offset the decrease in sales volume. By the time that higher pricing has exhausted its positive impact on revenues, the other two business segments will have expanded so that Altria's cash flow may not suffer a crisis.
Altria allocates approximately 70-75% of its yearly operating cash flow for the payment of dividends. Currently, the U.S. tobacco giant pays 80 cents per common share which, if held constant, leads to a forward dividend yield of 6.39% versus the industry median of 5% as of June 3.
Following the more than 6% drop U.S. equities saw in May due mainly to fears about a trade war, shares of Altria Group are more affordable than they were a few weeks ago.
The share price of $50.1 at close on Monday is below the 200, 100 and 50-day simple moving average lines, and about 7.6% from the middle of the 52-week range of $42.40 to $66.04.
The share price declined 11% for the 52 weeks through June 3.
The market capitalization is $93.73 billion.
The price-earnings ratio of 15.27 compared to the industry median of 17.38 and the price-sales ratio of 3.79 versus the industry median of 2.66 indicate Altria is not expensive.
The 14-day relative strength indicator of 38 suggests the stock has yet reached oversold levels.
Wall Street issued an overweight recommendation rating for shares of Altria Group Inc., which means that the stock is foreseen to outperform either the industry or the overall market within 12 months.
The average target price of $58.73 mirrors 17.2% upside from the share price at close on Monday.
GuruFocus assigned a financial strength rating of 5 out of 10 and a profitability and growth rating of 8 out of 10.
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Disclosure: I have no positions in any securities mentioned.
