Is Altria Group Too Cheap to Ignore at Today's Price?

Take one quick look at the stock on a screener, and you may think "undervalued" is an apt description for Altria Group (NYSE: MO).

The company, which sells Marlboro cigarettes in the United States, has a low forward price-to-earnings ratio (P/E) and a high forward dividend yield and looks very cheap today. But don't underestimate how much "cheaper" shares could get in the months ahead.

It all has to do with Altria Group's "smoke-free strategy" -- or rather its lack of success so far with such a plan, to be blunt. Concerns remain high that this cigarette company has become at best a "cigar butt" investment (a Warren Buffett term for a troubled-asset stock) and at worst a value trap.

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Altria inched up after a post-earnings plunge, but proceed with caution

Late last month, the company's shares plunged after a quarterly earnings release. Even as the results slightly beat sell-side analyst estimates, investors reacted negatively to news of Marlboro-branded shipment volumes falling by 11.7%.

That figure is higher than the reported volume declines across all of Altria's cigarette brands, which suggests that smokers may be switching to lower-priced, lower-margin brands -- if not making the switch to smokeless tobacco and nicotine alternatives. If that's not bad enough, Altria also reported relatively lackluster results for its oral tobacco products.

That segment includes legacy smokeless tobacco brands like Skoal and Copenhagen, as well as the company's on! nicotine pouch. During the quarter, shipment volumes for Skoal and Copenhagen fell 17.1% and 12.4%, respectively, while on! shipment volumes increased by only 0.7%.

Alongside this, investors also reacted negatively to Altria's updates to its guidance, perceived as weak relative to expectations. Given these many negatives, it's not surprising that shares tanked by nearly 8% following the earnings release. The stock may be inching higher once again but could remain at risk of further volatility down the road.

Wait for lower prices before buying

Currently, Altria Group trades for around 10.4 times forward earnings. This forward P/E is well below that of Philip Morris International (NYSE: PM), at 18.5 times forward earnings, so it may make Altria seem very cheap right now.

However, Philip Morris International, Altria's former corporate sibling, has been far more successful executing on its smoke-free strategy with its Zyn tobacco-free nicotine pouches -- 41% of Philp Morris revenue now comes from alternative products. So it makes much more sense for this stock to trade at such a premium valuation.

British American Tobacco (NYSE: BTI), parent company of R.J. Reynolds and the maker of cigarette brands including Camel and Newport, trades at a higher valuation than Altria, at around 11.5 times forward earnings. However, with British American generating 18.2% of its revenue from alternative products, versus just 14% for Altria, it has arguably made more progress with this pivot as well.

Hence, I wouldn't assume that Altria Group will all of a sudden experience valuation expansion, pushing it back to be on par with these competitors. Instead, shares could keep pulling back if concerns about cigarette sales volumes and alternative-product growth persist. Remember, just a few years ago, Altria was trading at a P/E in the high single digits. You may want to wait for this to happen again before declaring the stock too cheap to avoid.

Otherwise, wait for major change to happen

For now, Altria could be a value trap and a yield trap. Its forward dividend yield of over 7% may seem tempting, but what if the stock declines further, falling by double digits and outweighing the dividend payouts?

Waiting for this cheap stock to become even cheaper may be the safest option, but something else, if it emerges, could signal that it's time to buy. I'm talking about the trends mentioned above either reversing, or the company making a game-changing move related to diversification into alternative products.

For instance, there could be a major breakthrough resulting from Altria's collaboration with South Korean tobacco company KT&G to produce nicotine pouches. Or, perhaps from Altria engaging in mergers and acquisitions that increase its smoke-free exposure.

In short, either wait for Altria's valuation to revisit historic lows -- or for signs of major change -- before making this blue chip stock and Dividend King a buy.

Thomas Niel has no position in any of the stocks mentioned. The Motley Fool recommends British American Tobacco P.l.c. and Philip Morris International and recommends the following options: long January 2026 $40 calls on British American Tobacco and short January 2026 $40 puts on British American Tobacco. The Motley Fool has a disclosure policy.