Tobacco, one of the most lucrative industries in history. You’d be hard pressed to find
a better performing investment over the last century, but how long can it keep puffing
out profits? Today, we’re going to take a look at one of the largest tobacco companies
in the world, the Altria Group. A single dollar invested in Altria in 1968 would've turned
into $6,638 by 2015; that’s with dividends reinvested of course. This amounts to a total
return of 663,700%, or 20.6% annually. Smoking rates have been declining for decades, yet
the company has continued to grow by raising its prices. However, as I will soon explain,
the future of Altria may be less tobacco reliant than you thought. In this video, I’m going
to do a comprehensive stock review of the Altria Group and explain whether it deserves
a spot in your dividend stock portfolio.
My name is Zach and you should leave a like and subscribe to the channel if you enjoy
the video. You should never invest in a business you don’t understand, so today I’m going
to provide a full picture look at the business and stock history of the Altria Group.
Altria has a long and complex history, dating all the way back to 1847. It was originally
founded as Philip Morris, which went on to become one of the largest cigarette and tobacco
manufacturing companies. It became publicly traded in 1938 and by 1972 their top brand
Marlboro became the world’s best-selling cigarette brand. Around this time, the tobacco
business began to face huge political pressure. The health risks of cigarettes and tobacco,
became obvious, despite arguments from Big Tobacco Companies. Ultimately the industry
became heavily regulated, faced constant lawsuits, had its advertising ability banned, and encountered
numerous anti-smoking public health campaigns. This caused cigarette smoking rates to decline
from 42.4% of adults in 1965 to 13.7% in 2018. Additionally, the average number of cigarettes
smoked per day among smokers decreased as well. Despite this, the tobacco business continued
to financially grow, as they raised prices to counteract falling usage.
Although heavily tobacco reliant, Philip Morris & Co, was really just a holding company. They
purchased or had ownership in many different businesses over the years. For example, they’ve
previously owned both Kraft Foods and the Miller Brewing Company. In 2003, the company
rebranded from Philip Morris Companies to Altria Group. The reasoning for this was to
emphasize Altria as being a holding company and begin to make a distinction between it
and the tobacco connotated Philip Morris. In 2006, Altria split off Philip Morris’
international business which is now traded under the ticker symbol (PMI). In recent history,
Altria has made many investments trying to future-proof the business.
So what does Altria’s business look like today? Altria Group holds diversified positions
across tobacco, alcohol, and cannabis. Their goal is to provide products to adult consumers,
while returning maximum value to shareholders through dividends and growth. Altria is broken
up between their operating companies, service companies, strategic investments, and joint
ventures. Their operating companies are businesses they
wholly-own. This includes Philip Morris USA, which is the nation's leading cigarette manufacturer.
Between all their brands, Philip Morris controls 49.7 percent of the cigarette retail share.
This is led by their Marlboro brand, which controls 43.1% alone. Marlboro is unquestionably
the most popular cigarette brand and has been proven to retain popularity over many decades.
Philip Morris USA is still the backbone of Altria’s cash flow. Another Altria holding,
is the U.S. Smokeless Tobacco Company. It’s led by the brands Copenhagen and Skoal, which
make up 53.9% of the total smokeless tobacco market share. Altria also owns John Middelton,
which is a leading manufacturer and marketer of pipe tobacco and cigars. It owns popular
brands like Black & Mild. Outside of tobacco, Altria owns Ste. Michelle Wine Estates, which
is a top 10 producer of premium wine in the United States. This is a very small part of
Altria, in comparison to the smokeable and smokeless tobacco section, but it offers much
needed diversification. Altria’s final operating business is the Philip Morris Capital Corporation.
This is an investment company that manages a portfolio of leased assets including domestic
and international aircraft, power plants and real estate.
Alrtia’s service companies include Altria Client Services and the Altria Group Distribution
Company. Their internal client services business provides Altria subsidiaries with services
from various areas of expertise. This includes legal, marketing, analytics, finance, regulatory,
etc. Their Distribution company provides sales, distribution and consumer engagement services
to Altria's tobacco companies. Altria’s Strategic Investments have grown
significantly in recent years. In 2016, Altria made an investment in Anheuser-Busch InBev,
giving them 10.2 percent ownership. They are the world's largest global brewer and own
popular alcohol brands like Budweiser, Corona, and Modelo. This helped diversify Altria’s
business away from Tobacco, while providing cash flow and adding a strong asset to their
balance sheet. In 2018, Altria made a $12.8 billion investment in JUUL Labs, giving them
35% economic interest in the company. This is the U.S. leader in e-vapor, which is a
healthier alternative to cigarettes. Juul has a fantastic business model and was a viral
product for a number of years. It offers a natural transition for Altria’s business
as they look to offer healthier alternatives for smokers. However, JUUL has seen significant
political pressure due to how popular it became among teens and young adults. This resulted
in flavored vapor being banned, significant regulations, and massive lawsuits against
the company. In the short term, JUUL has become a financial burden for Altria, which I’ll
discuss later in the video, but it remains an interesting long term play. Another Investment
Altria made in 2018, was an agreement to acquire a 45 percent equity stake in the Cronos Group.
This was Altria’s first move into the cannabis sector, which is another logical path for
the future of the company. Cronos owns various CBD, Medical, and Recreational Marijuania
companies based in Canada. Similar to Juul, I agree with Altria’s strategic angle of
this investment, but it’s caused financial burdens in the short term.
In 2019, Altria made a joint venture to acquire 80% ownership of certain companies that manufacture,
market, and distribute “on!” nicotine pouches globally. This is actually a very
interesting move and nicotine pouches are a growing industry that offers another alternative
to tobacco. Overall, I think Altria management is making
the right strategic decisions in positioning their business for future growth. However,
many of these decisions have been financially painful, which has caused losses and explains
the decline in Altria’s stock over the past few years.
In whole, Altria has many competitive advantages that allow it to retain market share and ensure
future profits. They have powerful brands such as, Marlboro, Black & Mild, Copenhagen,
Skoal, ON, JUUL, Budweiser, Corona, Modelo, and even these newer cannabis companies have
been putting a focus on brand building. This helps promote customer loyalty, which is very
important to growing and retaining market share. Additionally, nearly all their products
are high margin with ability to raise prices, which gives them great cash flow to invest
in new areas. Altria should have the ability to buy their way into future markets as the
tobacco business declines, which is already shown by their JUUL and Cronos investments.
Perhaps most importantly, although it may seem bad to say, many of their products are
highly addictive which increases predictability of profits significantly.
These advantages are not without major risk. The company is prone to expensive lawsuits,
Government regulation, specific taxation, changing consumer behavior, and growing negative
sentiment around the tobacco industry. Altria gives an extremely detailed accounting of
all their potential risks in their annual report, which is linked in the description.
However, if you read only that section you’ll likely never want to touch this stock.
(Death Sticks) Health… It’s obvious that smoking is addictive and bad for you. This
has been widely known for over 50 years. I understand that people may choose to not invest
for that moral reason and there’s nothing wrong with that. However, from my perspective
the health consequences are so widely known and people still choose to use the products.
At a certain point we have to stop pretending that people don’t have personal responsibility
for their choices. A lot of people just enjoy using these products. They are aware of the
health impacts and they choose to use it anyway. That doesn’t mean we shouldn’t have public
health campaigns and try to persuade children away from using it. We can do both. Heck Companies
like Altria invest heavily into these types of campaigns themselves. Now I know that this
opinion is not shared by everyone(Cnbc clip). Alright now let’s dive into the economics
of the business. For perspective, 87% of revenue comes from smokeable products, 10% from smokeless
products, and 3% from wine. So Altria is still very much reliant on it’s core tobacco business,
despite efforts to diversify. Altria’s revenue has been steady around $24-25 Billion over
the last 10 years. However, the gross profit, operating income, and net income have all
been growing in the same time frame. The gross profit has grown from $9.1 Billion to $12.7
Billion, which is a 13.66% 10 year compound annual growth rate. The operating income has
grown from $6.2 Billion to $10.3 Billion, which is a 15.15% 10 year compound annual
growth rate. The net income has seen similar growth going from $3.8 Billion to a peak of
$14.2 Billion. However, in 2019 the net income was negative $1.3 Billion. The reasoning for
this is the financial burden of JUUL and Cronos. Altria had to pay over $8.6 Billion in JUUL
impairment charges and over $1.4 Billion in Cronos losses. This is the financial burden
this investments have caused, making their 2019 Earning Per Share negative. Some of these
losses and impairments have carried over into 2020, but hopefully JUUL and Cronos will soon
get over their legal troubles, stabilize, and become profitable in the future.
So aside from the JUUL and Cronos losses, which lowered recent net income, Altria has
been steadily growing it’s cash flow. The 2019 free cash flow per share is $4.06, which
is far greater than dividend per share of $3.28. Despite changes in consumer behavior
around smoking, Altia’s cash flow has allowed it to pay a consistently increasing dividend.
The Altria dividend has seen 51 years of dividend growth, with a 9.4% 5 year growth rate, and
a current 8.22% dividend yield. The payout ratio has hovered between 75% to 80%, which
is actually the target payout ratio of the company. According to the Q3 Report, Altria
has a long-term objective of a dividend payout ratio target of approximately 80% EPS.
The past year, Altria has been valued at its lowest price in the past 6-7 years. It has
a 9.59 PE ratio which is incredibly difficult to find in an overvalued market like we have
today. This low price is what’s fueling the very high 8.22% dividend yield. This type
of yield on cost is unheard of in Altria’s history other than the past year or so. Normally
Altria trades between a 3-5% dividend yield. Despite this high yield, the dividend is incredibly
safe and likely to continue to grow. In fact, it just had a 2.3% dividend raise this past
July. Based on Q3 earnings, Altria is set to surpass it’s 2019 numbers, pointing to
continued growth for the company. In terms of the dividend, Altria seems to
be a very interesting investment opportunity right now. On top of this, I think it actually
has a compelling long term bull case as well. Altria has a real opportunity to become a
major player in the cannabis space, especially if Marijuania is legalized recreationally
across the United States. If or when this happens, I expect Altria management to pounce
on the opportunity. In the perfect version of that scenario, Altria has a ridiculously
high ceiling. I love the opportunity in this company, but the legal problems are what hold
me back from investing heavier. Lawsuits, government regulation, and tobacco declines
are all real risks in owning Altira Long term.
Currently, I have 44.19 shares of Altria, with a dividend yield of 8.82%, and a cost
per share of $40.08. So in total I have $1,723.79 invested in MO. Personally, I’ll be buying
more when the share price is around or below my cost per share. However, don’t take my
advice blindly and be sure to do your own research before making any investment decisions.
Thank you for watching Dividend Data. I’d greatly appreciate it if you leave a like
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