Investing.com -- Moody’s Ratings has upgraded the outlook for Altria Group (NYSE: MO ) Inc. to stable from negative. The ratings agency also affirmed Altria’s A3 long term issuer rating, A3 senior unsecured notes ratings, (P)A3 senior unsecured MTN program ratings, and Prime-2 commercial paper ratings.

The shift to a stable outlook reflects Altria’s enduring strong market position, specifically with its Marlboro brand. The company continues to show high profitability with a robust 61% EBITA margin. Altria has also shown good pricing flexibility in its smokable segment, counterbalancing declining cigarette volumes and returning to positive operating company income (OCI) growth. The company has maintained a low financial leverage with a debt-to-EBITDA ratio of 2.0x as of December 31, 2024.

The stable outlook also takes into account the decreasing near-term regulatory challenges in the US. This comes after the current administration’s withdrawal of the proposal for a menthol cigarette ban in January 2025 and the likely withdrawal of the proposal for lower nicotine in cigarettes by September 2025.

The affirmation of Altria’s ratings reflects the company’s continued strong operational capabilities and financial flexibility. This allows the company to keep investing in the transition to alternative tobacco products. Altria also benefits from its extensive US distribution network, strong brands, and deep consumer knowledge.

Altria’s ratings also consider its leading market position as the largest tobacco company in the US by both revenue and volume. The company’s financial flexibility is strengthened by a strong operating profit margin, one of the highest in the consumer products sector. The company aims to expand its portfolio of alternative tobacco products to transition the consumer to a smoke-free future by 2030. This includes alternative nicotine delivery mechanisms such as On! and Copenhagen (oral tobacco), and a partnership with Japan Tobacco (OTC: JAPAF ) to distribute Ploom (heat-not-burn) and SWIC (heated capsules) in the US in the future.

However, the company’s credit profile is constrained by the persistent decline in combustible cigarette volumes, driven by social risks related to consumer focus on health. The company also faces litigation and regulatory risks that could accelerate cigarette volume decline. These challenges could weaken operating cash flow, while a high dividend payout limits free cash flow and the company regularly repurchases shares. Altria’s 2.0x net debt to debt leverage target (based on the company’s calculation) is conservative and helps provide financial flexibility to navigate these challenges. Altria’s 8% stake in Anheuser-Busch InBev SA/NV (EBR: ABI ), worth roughly $10 billion, provides an additional source of cash, further strengthening financial flexibility.

The ratings could be upgraded if litigation risks decline significantly, and if there is decreased regulatory risk around tobacco smoking products and e-cigarettes. A successful management of the decline in cigarette volumes by materially increasing the share of earnings from alternative tobacco products while also growing EBITDA will also be necessary for an upgrade. The company will need to maintain financial leverage comfortably below 1.75x gross debt/EBITDA.

On the other hand, the ratings could be downgraded if Altria is not successful in building earnings from alternative products to offset the rapid cigarette volume decline. A downgrade will also be considered if cigarette pricing flexibility deteriorates, cigarette volumes continue to decline rapidly, litigation risks increase, or if Altria fails to effectively manage the regulatory environment. Debt/EBITDA maintained above 2.25x could also lead to a downgrade.

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