Altria: One of the Best Run Companies

Altria Group (MO), formerly known as Philip Morris, is the largest domestic produce of tobacco and tobacco related products. MO is currently trading within 5% of its 52-week low and has increased its dividend 42 consecutive years in a row according to Mergent Online. Because MO has spun-off its Kraft (KFT) and international divisions within the last 2 years, I cannot do a reasonable assessment of the stock price based on Dow's theory.

According to Geraldine Weiss's Investment Quality Trends, which tracks dividend paying companies, MO is undervalued when the company yields 5% or more. In periods before 2001, IQTrends viewed MO as undervalued with a yield of 6%. The current yield on MO is 8.5%. At the current yield, if reinvested in the company, the value of current funds invested would double in approximately 8 ½ years. This doubling of the value would occur provided the company maintains the current dividend regardless of whether or not the stock price rises.

WARNING: According to Valueline, MO has a projected payout ratio of 75% after adjustments for the spin-offs. This payout ratio is extremely high for any company except for a utility. Any pressure on the earnings could result in a 100% or more payout ratio, this could result in a burn of the company's cash stockpile or borrowing at unfavorably high interest rates.

To get a better understanding to the rational of this investment opportunity we need to consider the many external aspects that impact this stock. First, because of the Tobacco Master Settlement Agreement (MSA), MO is mandated to remain profitable so that it can pay its portion of this all-encompassing lawsuit. Furthermore, states have sold future revenue bonds based on the projected income the MSA was to provide. This fact has forced the various state attorney generals to enforce laws against any "illegal" activity from start-up tobacco companies that wish to operate outside of the state that they are headquartered.

Because of the numerous laws that have been set up to protect the newly created tobacco oligopoly based on the MSA, MO has a lifeline that it ordinarily wouldn't have if smoking was simply outlawed altogether. Aside from being outlawed and taxed 1,400% in an effort to end smoking due to its health risks, which didn't work in England in the 1700's, let us look at this company from a different perspective.

The very best analysis of a worst-case scenario on Altria is Jeremy Siegel's research paper "The Nifty Fifty Revisited." Although Siegel never intended for it to be an endorsement to buy MO, the paper gives the most compelling reason why MO is and always will be a preferred investment choice at almost any price. Siegel's overall point in the paper is that if an individual were to invest in the highest P/E stocks at the peak of the stock market in 1972 then, despite the 50% decline in the Dow Jones Industrial Average that followed, investors would have come out ahead by a country mile.

Siegel goes on to examine the famous "Nifty Fifty" stocks of that era which experienced the inflation-adjusted loss in the market of 72% from 1966 to 1982. The '66 to '82 period was the second largest decline in the stock market since 1929. Despite this fact, MO returned, after-tax and adjusted for inflation, the highest return at a 13.14% compounded annual rate from the high in 1972 to 1995. Delving deeper into the abyss of data for a little more perspective, from the periods of 1920-1987, 1930-1987, and 1950-1987 MO has had a compounded annual growth rate of 11.37%, 12.17%, and 16.24%.

I personally owned MO when it was trading at $19 in early 2000 yielding 10%. Foolishly, I sold MO at $55 in 2002 for a ridiculous gain of over 200% in 2 years. Had I held on to the stock I would have benefited from the most astounding yield from a company that is among the best run companies, which is saying a lot given the amount of animosity it garners. Best regards in your research of Altria.

Disclaimer: I bought MO at $14.99 on 12/09/2008.

Comments

[Dividend Gr...:]

I own MO as I like the company and its ability to increase dividends and buy back stock consistently. The current MO however is different than the Altria that Siegel discusses, as it doesn't include international operations. However If you also own PM you should do just fine ( I own that one too)

The high payout for MO is a warning sign.. The thing however is that the tobacco industry is in a decline and there should be little in capital investment for the future. Furthermore the company doesn't have a lot of options to reinvest in its business other than acquisitons..

2008 Dec 10 10:55 AM

[Chirag Amin:]

Even though many feel that Altria overpaid for the acquisition of UST, I feel that the UST acquisition by MO will allow the company to maintain a "healthy" revenue stream.... MO should be able to sustain its dividend, as they continue to unlock shareholder value through share buybacks and responsible dividend increases......

2008 Dec 10 04:13 PM

[jackooo:]

I own it. Best stock I ever bought.

2008 Dec 10 10:31 PM