Altria Group Inc.'s Best Segment So Far in 2016

Tobacco giant Altria Group (NYSE: MO) has given long-term investors extremely high returns over time, and the success of its cigarette business has played the key role in producing and building the profits that have funded its dividend payments and sent its stock price soaring.

Yet when you take a look at the results Altria has had so far during 2016, the cigarette business doesn't stand out as the top performer in Altria's arsenal. You have to look elsewhere in the tobacco market to find the fastest-growing part of Altria's business. Although it doesn't make up a huge portion of Altria's overall revenue, it shows signs of dominating its industry niche, and should continue to add to the tobacco giant's overall financial success.

Image source: Altria.

Going smokeless

For all the attention that Altria's Marlboro cigarette brand gets, many investors don't realize that Altria has a business other than smokeable products. Yet Altria's smokeless products segment has seen much better performance so far in 2016 than its cigarette segment, and that stems from having the most popular brand in the industry under its corporate umbrella.

Looking at first-half results, Altria has seen total revenue from smokeless products climb above the $1 billion mark; after accounting forexcise taxes, top-line net sales of $935 million are up almost 11% from the year-ago period. Altria has done an even better job of raising profitability from the unit, boosting adjusted operating company income by more than 15% to $631 million. That produced margins of 67.5%, which are far more impressive than the roughly 49% figure that the cigarette business posted during the first half of 2016.

In addition, shipment volumes have been higher in the smokeless arena than for cigarettes. During the first half of 2016, shipment volumes for smokeless products were up 6%. Even after accounting for favorable trade inventory movements and other factors, an adjusted increase of 4% in first-half volume outpaced Altria's estimate of how much growth the overall industry experienced during the same period.

How Copenhagen has come to dominate smokeless tobacco

The primary brands that Altria offers in the smokeless realm are Copenhagen and Skoal, and in recent years, Copenhagen has taken a huge lead over its peer. During the first half, Copenhagen made up almost two-thirds of Altria's premium-brand smokeless tobacco shipments, and nearly 60% of total volume including discount and other products. Copenhagen's market share rose to 34% in the second quarter, and the brand has enjoyed a nearly two-percentage-point gain in the first half of the year, compared to 2015's first half. By contrast, Skoal has seen its market share slip lately. Nevertheless, Copenhagen's success has pushed the overall smokeless tobacco business higher, and Altria boasted 55.5% share of the smokeless market in the first six months of 2016.

What Altria sees in smokeless products

Altria believes that smokeless tobacco can produce long-term benefits for the company, and it has doubled down on the success of Copenhagen. The company has invested most of its efforts toward building up Copenhagen's business, accepting the resulting loss of importance for Skoal.

At the same time, Altria has centered innovation on Copenhagen. The company has expanded its Copenhagen Mint line of smokeless tobacco, with a national retail presence helping to push market share higher. As CEO Marty Barrington noted following Altria's most recent financial report, Copenhagen Mint "has performed extremely well, bringing excitement to the brand for both adult dippers and for the trade."

Altria has high hopes for smokeless products, with the expectation that the division will continue to press for a share of resources to bolster its business prospects for the long run. Even though smokeless makes up only a small portion of the company's overall sales, Altria and its shareholders benefit from the high-margin business, and that could lead to better results well into the future.

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