Will Altria Get Burned By Juul?

Written by John Peterson
Posted February 15, 2019

Has Altria Group Inc. (NYSE: MO) pitched itself down a path of no return?

Altria is one of the world’s largest producers of tobacco and vape-related products, but its recent acquisition of a 35% stake in Juul Labs Inc. may spell peril for this Fortune 500 company.

Altria’s stake, worth an estimated $12.8 billion of the $38 billion e-cig newcomer, has drawn the ire of the Food and Drug Administration.

The FDA has made it abundantly clear that it believes Juul is majorly responsible for what it’s calling “the youth vaping epidemic.”

Vaping among high school students rose 78% from 2017 to 2018, and those numbers continue to skyrocket. 33% of middle and high school students report that they’ve seen a vaping device used in school. 4.9 million middle and high school students say they’ve actually used a tobacco product in the past 30 days.

And the Juul device is the biggest part of that problem. It has a small, sleek design. It’s easy to use and even easier to conceal.

The fact that the Juul is so easy to conceal has been a major selling point in the company’s targeted radio ads. I hear them constantly on my Baltimore radio stations, and the target demographic seems to be closeted smokers. The ads include testimonials from men and women who claim that they no longer need to sneak off to have a smoke and they no longer smell it on their clothes.

This kind of advertising is subversive, because it seems Juul’s primary consumers aren’t parents trying to hide smoking from their kids, but kids trying to hide smoking from their parents.

Additionally, the flavors available for the Juul seem to be targeting the youth market. Those flavor pods have become the battleground on which the FDA wages its war against youth vaping.

Name-brand Juul pods are available in seven flavors: Fruit Medley, Mango, Creme Brulee, Mint, Cucumber, Menthol, and Classic Tobacco. The FDA no longer allows those first five flavors to be sold in gas stations or convenience stores, as their sweeter flavors are more appealing to the youth market. Walgreen’s has been specifically singled out by the FDA commissioner as the biggest offender in providing Juul devices and pods to the underage market.

However, after the recall, the menthol and tobacco flavors remain, as they seem more suited to Juul’s stated purpose of helping adult smokers transition from traditional cigarettes. All of the flavors are still available for online purchase with a valid ID over 21.

Every Juul ad ends with the same slogan: “If you don’t smoke or vape, don’t start.” But the company has an absolute stranglehold on the $3 billion e-cigarette market — roughly 75%. Rather than reaching adult smokers, Juul’s real market is primarily young nonsmokers, who are being indoctrinated into a smoking culture and becoming addicted to nicotine in record numbers.

Samir Soneji of the Dartmouth Institute for Health Policy and Clinical Practice conducted a study on the rising prevalence of youth smoking. The study dates back to 2014, but recent developments have caused Soneji and his research team to switch their focus to the cultural impact of the Juul.

[Teens are] introduced to the behavioral cues of smoking. There’s no flame in e-cigarettes, but there’s a light, and you bring this cigarette-like object to your mouth, you inhale, you exhale a plume of vapor or smoke, so it’s a very similar kind of behavior. Studies have found that kids who hang out with other vapers change their attitudes around smoking… They start to have lower perceptions of harm around smoking, their attitudes change.

Now, this indoctrination to smoking culture has limitless appeal to Altria, who, despite its massive holdings in Philip Morris and other American tobacco, has seen a decline in recent years in accordance with a national decline in cigarette sales.

Altria has been down 25% in the past 12 months. Despite uncertainty in the regulations surrounding new vaping trends, Altria needs to prepare for the reality of the post-cigarette world.

For a company with its purchasing power, that stake in Juul seems like a no-brainer. But Juul’s ongoing FDA review and the high possibility of future recalls or legislation has shareholders and potential investors wary.

But I’m telling you, now may be the time to buy the dip. Altria is now a high-yield dividend stock. The dividend yield is up to 6.5%, with the spending of the past four years below 4%.

I’m not going to buy a Juul. I’m hoping none of my children have experimented with those Sudafed-looking pods. The research into the long-term effects of vaping is still very new, but it seems these young vapers aren’t scared of health warnings or their potential to develop “popcorn lung.”

I think morally, Juul is hazier than a cloud of vape smoke. And who knows what sort of regulations the FDA will unload in the future. But for now, Altria (NYSE: MO) is looking like a solid buy.

That’s all for now.

Until next time,

John Peterson
Pro Trader Today

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