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Income-oriented investors tend to be attracted by Altria Group (NYSE: MO) However, due to its high yield of 8.6% and long history of annual dividend increases since 2009, the company has struggled to grow its revenue, with revenue declining each of the last two years and in the first quarter of this year.

However, this could soon change as Altria’s NJOY business is expected to see further growth following a recent positive announcement from the U.S. Food and Drug Administration (FDA).

Potential NJOY-driven growth

While the FDA is more known for taking a tough stance on tobacco products, especially flavored products, Altria recently received some good news when the government agency approved the sale of four menthol e-cigarettes from NJOY. Two of the products – NJOY’s Ace Pod Menthol 2.4% and Ace Pod Menthol 5% – are refillable pod products that work with the Ace vaping device. In addition, two disposable e-cigarette products, NJOY Daily Menthol 4.5% and NJOY Daily Extra Menthol 6%, were also approved.

Altria acquired NJOY last year for $2.75 billion in cash, plus the possibility of additional payments of $500 million if certain products receive FDA approval. As a result of this decision, Altria will pay NJOY’s previous owners an additional $250 million, with the final $250 million payment contingent on the approval of blueberry and watermelon-flavored capsules that work with the ace 2.0 device. Given the criticism surrounding flavors that appeal to teens, approval for these products seems less likely.

However, now that NJOY has the only FDA-approved flavored vaping products on the market, the company is in a good position to increase its market share in the U.S. At the end of the first quarter, the company only had 4.3% market share in consumables and 11.5% in devices, so there is still plenty of room to grow.

In addition, Altria is looking to expand the brand’s distribution and recently launched its first retail program to give NJOY products more visibility in retail. Distribution was increased to 80,000 points of sale at the end of the first quarter and the company will seek to increase this to 100,000 points of sale by the end of the year.

The only problem Altria has encountered with NJOY is that illegal Chinese flavored vaping products, such as those made by Elf Bar, continue to gain market share in the U.S. despite being illegal products. These products often enter the country labeled as other items to circumvent U.S. regulations and find their way into vaping shops where they are sold illegally. Altria has sued manufacturers, wholesalers and retailers to curb the sale of the illegal products.

Currently, however, Altria has the only legal flavored vaping products on the U.S. market. And even though that flavor is menthol, that should fuel growth.

Cigarette pack.Cigarette pack.

Image source: Getty Images.

Is it time to buy Altria?

NJOY gives Altria the opportunity to return to some revenue growth, but even with slightly declining revenues, the company still generates tremendous cash flow. Last year, the company generated $9.3 billion in operating cash flow and $9.1 billion in free cash flow, excluding capital expenditures (capex). This gave the company a strong dividend coverage ratio of 1.3 times free cash flow, showing a high level of safety for the dividend and the ability to continue to increase it in the coming years.

The stock now trades at a price-to-earnings (P/E) ratio of around 9, which is a very reasonable valuation. If NJOY can help spur some growth, that P/E could rise even further.

MO PE Ratio (Forward) ChartMO PE Ratio (Forward) Chart

MO PE Ratio (Forward) Chart

Given NJOY’s attractive yield, well-covered dividend, and low valuation, as well as its potential to drive some revenue growth, Altria seems like a solid option for investors looking for nice dividend income that should continue to grow over the years.

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Geoffrey Seiler does not own any stocks mentioned. The Motley Fool does not own any stocks mentioned. The Motley Fool has a disclosure policy.

Can NJOY Help Drive Altria Group’s Stock Price Higher? was originally published by The Motley Fool

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