I bought shares of Altria for $39.53 last week. This is a new position and it makes up close to 10% of my portfolio. That’s a big chunk of my total wealth and it shows you that I believe the risk-to-reward is solid. Altria has a long history of rewarding shareholders.
The company has increased its dividend over the last 49 years. This easily makes it an elite dividend aristocrat (after adjusting for a spinoff of Kraft Foods in 2007). And with shares down 50% from an all-time high, the dividend yield has soared. I was able to lock in shares with an 8.5% yield. This is just one of many reasons I bought Altria stock.
Here’s the last ten years of annual dividend per share growth…
To see why I’ve invested in Altria, let’s start with some highlights of the potential reward and risk factors. Then below, I’ll go into more detail on a few of the factors.
10 Reward Factors for Altria Investors
- Dividend Aristocrat with 49 Years of Dividend Growth
- Big 8.5% Dividend Yield
- Recession Proof Products
- Strong Economic Moat and Pricing Power
- Sin Stocks Have Outperformed
- Altria Owns 10.1% of Anheuser-Busch InBev (BUD)
- Expanding into Marijuana with 45% stake in Cronos Group
- Strong Balance Sheet and Cash Flows
- Authorized $1 Billion Share Repurchase Program in July 2019
- High Investor Fear and a Resulting Low Valuation
5 Risk Factors
- Declining Cigarette Sales
- FDA Announced Tough Tobacco and Nicotine Regulation Plan in 2017
- Overpaid for a $12.8 Billion Minority Stake (35%) in JUUL
- Growth in Socially Responsible Investing and Fund Restrictions
- Majority of Sales in the United States
Is Altria Worth $74 Billion Less Than It Was in 2017?
Altria has gone from a top market cap of $149 billion in 2017 to about $75 billion today. That’s a steep 50% drop that’s wiped out $74 billion. But is the company really worth half of what it was two years ago?
… maybe, but I like the odds that it’s still worth more.
Sum of the Parts with BUD, JUUL and CRON
Altria owns a 10.1% stake in BUD, the alcohol giant. At current levels, that’s worth close to $15 billion or 20% of Altria’s market cap. So my Altria purchase is also a partial play in BUD. It’s another recession resistant company that provides some diversification. Although, I admit that the BUD valuation is a bit lofty right now. Either way, I believe I’m getting a discount on BUD through Altria due to investors’ fears.
Now let’s get this one out of the way. JUUL has regulators clamping down on its business. From marketing to health risks, fines and regulation are on their way. There’s no doubt there JUUL has misstepped and Altria’s 35% stake for $12.8 billion is hard to justify. But I think that’s already baked into Altria’s valuation. And with new regulation, JUUL will adapt and become protected. Smoking regulation is a double edged sword. States collect a great deal of tobacco tax revenue that they don’t want to lose. JUUL will be another way for politicians to line their pockets.
Altria also recently acquired a 45% stake in CRON, a marijuana company for $1.8 billion. That’s a steep price tag for the business but it’s forward looking. Federal legalization in the US is near inevitable. It might take five to ten years, but when it happens, Altria has the ability to help scale the marijuana business – from sourcing to distribution and marketing.
Sales and a Strong Balance Sheet
Cigarette sales are declining. According to the CDC, the percentage of adults smoking in the U.S. has declined from 20.9% in 2005 to 15.5 percent in 2016. Although, tobacco companies have strong pricing power.
Altria’s sales have climbed from $15.9 billion in 2008 to $19.6 billion in 2018. This has helped the company continue to profit and keep a strong balance sheet. On top of that, regulatory scrutiny has also pushed Altria to play it safe with its accounting practices.
On the debt side, Altria has leveraged up with its stake in JUUL. But the company still holds an investment grade credit rating (BBB) from the S&P. Here’s a breakdown of Altria’s debt and when it’s due…
There’s $1 billion due next year and the rest of it is spaced out. Over the next ten years, it’s an average of $1.8 billion due annually. So Altria can easily cover these debt payments with its cash flow. Plus, Altria can always refinance if necessary with low interest rates.
Now here’s the important question. After debt payments, is Altria’s dividend safe? To answer this, let’s look at Altria’s free cash flow and total dividends paid…
Both free cash flow (in blue) and total dividends paid (in orange) are climbing. Free cash flow has bounced around more but it has easily covered the dividend payouts. Analysts also project the payout ratio will remain just below management’s 80% target.
Buying Back Shares at a Discounted Price
Altria’s board of directors authorized a $1 billion share repurchase program in July 2019. Now generally I’m not a fan of buybacks – just like Warren Buffett. Management teams will use them to juice EPS and other per share numbers, which they’re often compensated on. But when shares are beaten down and the balance sheet is strong, buybacks are good for existing investors.
Plus, it’s a little buffer to pay dividends incase cash flow slips. Management would almost definitely cut the buybacks before cutting dividends.
Rule of 72: If Altria keeps paying its $3.36 dividend, I’ll make the full investment back in dividends alone in less than 8.5 years. Although, there’s a good probability that Altria continues raising its dividend. Also, the rule of 72 assumes reinvestment at the same rate. You’re about to see why I don’t automatically reinvest.
Why I’m Not Reinvesting Altria Dividends
Automatically reinvesting dividends is a great plan for most investors. The approach compounds your investment and dividend income. Although, you buy shares during both the highs and the lows.
Instead of automatic reinvestment, I let the dividends pool up. Then a few times a year, I find other good risk-to-reward opportunities. For example, last December I bought shares of AT&T when many investors were fleeing the company. It had and still has plenty of risk but the reward is playing out. I’m up 40% in less than a year. Hopefully Altria follows suit with a turnaround.
Is Investing in Tobacco and Altria Ethical?
In a recent interview with Josh Brown, he said he hopes Altria’s stock goes to zero. He doesn’t want it in his portfolio and his clients’ don’t want it either. Socially responsible investing is picking up steam and funds are avoiding sin stocks. Although, I think it’s a slippery slope. What’s next… oil, alcohol, and fast food companies?
With Josh Brown’s logic he fails to recognize that buying existing stock doesn’t put new money into the business. It’s not a fresh injection of money going to Altria’s marketing department. The business will continue as-is when small investors exchange existing ownership.
Alas, he does distinguish that it’s a moral position against Altria and he’s not predicting a drop to zero. Over the last 100 years the best performing sector has been tobacco stocks.
From an investing and ethical standpoint, I’m clearly ok with investing in Altria…
But I don’t smoke and I hope my family and friends don’t pick up the bad habit. Although, I think it should be a free choice for adults to make for themselves.
One area that I stand strong is not letting tobacco companies market or sell their products to kids. And governments already have rules in place to prevent that. Companies that break these rules will pay huge fees.
Final Thoughts on Investing in Altria
Tobacco companies constantly get bad press. Although, they’ve been a great investment. Cigarette sales continue to decline but Altria has strong pricing power. The business is also expanding into other markets.
Investors’ fears have run high with Altria and they have pushed down the company’s valuation. As a result, Altria now makes up a large position in my portfolio. It could go either way but I’m ready for a bumpy ride. And I’ll continue to find beaten down companies that have what I find to be favorable risk-to-reward profiles.
P.S. I might be buying shares at a bad time. The market has run hot and we’re due for a recession. Here are six bear market indicators pointing towards a stock market crash.