Here's What's Ahead for Altria Group in 2018

In most years, a 9% stock price rise would be quite respectable. But in 2017, the performance that Altria Group (NYSE: MO) put up lagged the market's returns by more than half. Ongoing trends away from cigarette smoking were nothing new last year, but Altria also faced some newer challenges that could pose threats in the future.

Altria investors have a lot to consider in the coming year. Although potential new regulation could be detrimental to the company's existing cigarette and smokeless tobacco businesses, the possibilities that modified-risk products could have for new growth are intriguing. Let's look more closely at what to expect from Altria Group in 2018.

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Can Altria Group jump higher in 2018?

Most of those following Altria have reasonably high expectations from the tobacco giant in the coming year. The current price target implies a rise of about 13% from present levels, and when you add in Altria's current dividend yield, that brings potential total returns to around 17% for the year.

Trends in the traditional cigarette industry are unlikely to change for the better, but Altria continues to follow its strategy of raising prices in response to falling demand in order to keep revenue and profits rising. Major state tax increases that took effect in 2017 led to downward impacts in volume that were larger than normal, especially in the key California market. There's a more typical slate of proposed cigarette tax increases for consideration this year, and although early discussion of boosts in the range of $1 to $1.50 per pack in states like Iowa, New Mexico, and Wyoming would be negative for Altria, those markets are relatively small compared to California.

Altria does intend to fight back against rising competition from British American Tobacco (NYSE: BTI) on the cigarette front. A national expansion of Marlboro Ice aims squarely at BAT's Newport brand, as Altria tries to use the strength of the Marlboro brand to make a more aggressive move into the menthol cigarette category. Ongoing progress in tapping the full value of the Nat Sherman ultra-premium brand is also likely.

Looking beyond cigarettes

As we've seen with other tobacco companies, Altria's biggest potential growth opportunity comes from the reduced-risk product front. Already, Altria's investment in Nu Mark has led to strong performance for the MarkTen brand of e-vapor products, which saw volume growth of more than 50% in the third quarter of 2017 compared to the prior-year quarter. Expansion of the MarkTen product line and increased distribution to convenience stores and other traditional retail outlets should help keep the e-vapor momentum strong throughout 2018.

The greatest uncertainty stems from the possibility of being able to market the iQOS heated tobacco system in the U.S. at some point during 2018. For more than a year, the U.S. Food and Drug Administration has had the application from Philip Morris International (NYSE: PM) requesting recognition of iQOS as a modified-risk tobacco product eligible for domestic sale. Under the agreement between Philip Morris and Altria, Altria would have the exclusive right to sell iQOS in the U.S., subject to licensing fees paid back to Philip Morris. Given the success that Philip Morris International has seen with the heat-not-burn technology in markets like Japan, Altria is right to be optimistic about its prospects to revolutionize the tobacco industry in the U.S. if the FDA allows it.

Adding to the importance of the reduced-risk niche is the fact that the FDA made a major regulatory initiative during 2017 to require substantial nicotine reduction in existing products from Altria and its industry peers. Regulators are still seeking public comment on a range of issues and intend to issue proposed rules for further review on areas like menthol flavoring of cigarettes and health impacts from premium cigars. Nicotine regulation doesn't appear imminent, but FDA progress on the issue could affect Altria negatively in 2018 depending on the shape that any final rules take.

Altria is starting 2018 in a holding pattern as it waits for clarity on how to pursue what could be its best business prospect. Until regulators weigh in, Altria will likely simply continue its strategy of making the most of the Marlboro brand while moving in the direction of cigarette alternatives that can spur fundamental growth throughout 2018 and beyond.

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Dan Caplinger 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.