Moody’s Ratings Update on Altria Group Inc.

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Moody’s Ratings Update: Altria Group Inc.

Moody’s Ratings has revised its outlook on Altria Group Inc. from negative to stable. This decision underscores Altria’s robust market presence, notably through its flagship Marlboro brand. The agency affirmed several key ratings, including Altria’s A3 long-term issuer rating, A3 senior unsecured bond ratings, (P)A3 senior unsecured MTN program ratings, and Prime-2 commercial paper ratings.

The shift to a stable outlook reflects Altria’s steadfast market dominance and its significant profitability, evidenced by an impressive EBITA margin of 61%. The company has adeptly managed to counteract declining cigarette volumes through effective pricing strategies, leading to a resurgence in positive operating income (OCI) growth. As of December 31, 2024, Altria maintained a prudent level of financial leverage, with a debt-to-EBITDA ratio of 2.0x.

The improved outlook is further supported by a decrease in immediate regulatory challenges within the United States. The current administration’s withdrawal from its initial proposal to ban menthol cigarettes by January 2025, alongside the anticipated withdrawal of plans to reduce nicotine in cigarettes by September 2025, are significant developments.

The affirmation of Altria’s ratings highlights the company’s enduring operational excellence and financial agility, enabling continued investment in alternative tobacco products. Altria leverages its broad US distribution network, strong brand portfolio, and deep consumer insights to sustain its leadership position as the largest US tobacco company by revenue and volume.

Altria’s strategic goal is to transition its consumer base to a smoke-free future by 2030, expanding its portfolio with alternative nicotine delivery systems such as On! and Copenhagen (oral tobacco). The company is also eyeing future partnerships, notably with Japan Tobacco, to distribute products like Ploom (heating-combustion) and SWIC (heated capsules) in the US.

Nonetheless, Altria’s credit profile faces constraints due to the ongoing decline in traditional cigarette volumes, driven by health-related social risks. The company must navigate litigation and regulatory risks that could accelerate this decline, potentially impacting cash flow. High dividend commitments further limit free cash flow, compounded by regular share buybacks. Altria’s conservative net debt/debt leverage target of 2.0x enhances its financial resilience against these challenges. Additionally, its 8% stake in Anheuser-Busch InBev SA/NV (ABI), valued at approximately $10 billion, provides a valuable liquidity buffer.

Potential for Rating Upgrade: A ratings upgrade could be on the horizon if litigation risks diminish significantly and regulatory challenges for both tobacco and electronic cigarettes ease. Altria needs to manage cigarette volume decline effectively, ensuring EBITDA growth and a substantial increase in earnings from alternative products. Maintaining a gross debt/EBITDA ratio comfortably below 1.75x is also crucial for an upgrade.

Factors for Potential Downgrade: Conversely, a downgrade could occur if Altria struggles to offset cigarette volume declines with alternative product earnings. Deteriorating cigarette pricing flexibility, accelerating volume decline, rising litigation risks, or mismanagement of the regulatory landscape could all trigger a downgrade. A debt/EBITDA ratio exceeding 2.25x would also be a critical threshold for a potential downgrade.