Altria: Value Play or Value Trap? 22 comments
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In these market conditions, consistent, reliable high-yields are fantastic. It's also great when that company has monopolistic characteristics and is valued cheaply. A stock that fits these traits is none other than Altria Group (MO).
Although I believe there are many things to like, such as the sustainable high-yield, I think the growth prospects are so low that there has to be better investments out there. Although I don't necessarily think an investment in Altria is a terrible idea, I think there are other options that have significantly higher upside.
Here are some reasons why I believe Altria may be a value trap:
Increased Regulation - Although some aspects of new regulations are in favor of Altria, most are not. Government limitations on advertising give MO a large moat where new businesses can't easily enter the industry. Higher taxation however is a huge problem. Taxes on tobacco products are already at all time highs, and they are expected to go even higher, outpacing the rate of inflation. With Governor Patterson creating a 'fat tax', look for many states to increase taxes on Altria's goods. The taxes are easily justified and quickly passed, due to health concerns. Altria will have a tough time increasing prices to match the tax burden, which will cause even more users to dissent.
Pricing Problems - In addition to raising prices to offset the tax burden, MO will also have to raise prices to match inflation. This problem will be less bothersome because inflation may be low. But with the exponential increases in the money supply, deficit spending and bailouts, I wouldn't be surprised to see higher than normal inflation rates over the next few years. Altria could handle matching 3-4% inflation with price hikes, but 5-6% may be overpowering.
Lawsuits - The ever bothersome litigation has slowed in recent years, but the financial crisis may cause more people to look for 'easy' money. I believe most of the litigation problems have passed, but it is still a dark shadow that haunts over Altria's stock price. Altria has settled most existing lawsuits against them, allowing them to commit less capital towards them. Any increase in new lawsuits will hinder their advances.
Low Growth Possibilities - After spinning off possibly its best businesses - Kraft (KFT) and Philip Morris International (PM), this may be the final rotting piece of business that no one else wanted. Operating mostly in the US, Altria's growth prospects are limited. With US Government taxes and legislation, in addition to consumers trending towards 'green' and 'healthy' goods, Altria may not be able to gain as many users as it loses. If this is the case, earnings will fall, and eventually, the juicy dividend.
So what's the solution? If you are still intrigued with the business model and the industry, I suggest you take a look at Philip Morris International (PM). Because the international markets are still on the tobacco train, they should be able to grow earnings much faster than MO, possibly in the high single digits over the next decade. It currently yields a manageable 5.8% and should be able to pay off debt faster than MO due to currency exchange rates.
Overall, Altria may be a good stock, but I think there are so many great stocks out there that I wouldn't weight it too heavily in your portfolio. If you still wish to, I suggest you use PM as an alternative.
Disclosure: Author holds no positions in any security mentioned in this article
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KFT, being owned by Warren Buffet, may not be the real rotting piece as you claim.
Thanks for you thoughtful comments however, I agree with almost all your statements.
You could do a lot worse than count against a management team like Altria.
I wonder about this because MOST smokers are in the lower income levels and at some point will choose to pay their rent, keep their electricity on, and buy food over buying cigarettes for upwards of $40 a carton. My girlfriend and I both quit in Jan after having each smoked over 35 years. If this company is going to continue to do as well in the future as it has in the past it must find other sources of revenue than poor people killing themselves. People WILL choose food and a roof over their heads when it comes down to it.
Until recently, I swore off investing in so called sin stocks.
Today I see the world a bit differently. People have choices, they smoke or they don't smoke.
These stocks throw off lots of cash and pay a nice dividend.
I sold off my MO due to pay out concerns.
While parts of the world are opening their eyes to the bad habit of smoking, the growth prospects and a friendlier legal structure gives me greater comfort in my PM investment.
The "or the generic" part does nothing for Altria unless it's one of their generic brands. May not be.
On May 08 03:51 PM overtaxed42long wrote:
> Smoke 'em if you got 'em! I need you smokers to keep puffing to keep
> my taxes lower than if you quit. As far as consumeronstrike's opinion
> about people giving up their fix to pay the bills. I don't think
> so, most smokers will opt to buy a $10 pack of smokes (or the generic
> at $5/6) before not having the desire to smoke or the forethought
> of saving that $5 or $10 until the rent is due. Ciggarettes are a
> neccessity right along with electricity and water and with the ability
> to buy them anywhere for much less than any bill allows them the
> staying power even when that person knows they need to save that
> $5 or $10 to pay the bills. I think most smokers would roll their
> own Buglers or Tops if it got that bad. I hope it doesn't get that
> bad. Really we need to oust all these incumbents and get people in
> office who understand the reality that spending and raising taxes
> does not get anyone out of debt. EVER. It doesn't work. Look at all
> the countries who have tried and ended up with failed currencies.
> All of them. There is not one that came out on top by manipulating
> the money supply. Anyway, smoke 'em if you got 'em.
Sales growth last 5 years for Altria = MINUS 25%
The incredible pricing power of the Marlboro brand allows the company to fend off tax increases by raising prices on cigarettes. Year over year, cigarette sales are down, but the vast majority of smokers continue to pay any price for Marlboros, and they will continue to do so.
The Master Settlement Agreement has insured that MO will be around for a long time. The company has to exist and be profitable so it can make the payments to the states as mandated by the agreement. The proposed FDA regulation of tobacco will insure that MO maintains its market share and will keep MO as the preeminent tobacco company in the United States.
The annual dividend is $1.28 for this stock, which is trading for around $17. MO has raised the dividend annually for 30 years or so, and at a time when many companies are cutting or eliminating their dividend, I'm willing to bet anyone that MO raises theirs from 8-10% this summer.
If you kept the international unit (PM) after the spin, you will be astounded at the future growth. The dividend of $2.16 for a stock that closed at $41 or so Friday is almost 6%, so that's pretty nice too.
MO has been the core holding in my IRA for many years, and is one reason why I'll be sitting on a beach somewhere enjoying a drink with a little umbrella in it pretty soon.
On May 08 05:13 PM consumeronstrike wrote:
> Here's another thought;
> Sales growth last 5 years for Altria = MINUS 25%
MO has been one of the most stable stocks in my portfolio. Also it is naive to assume KFT is a good buy just because Warren Buffet owns part of it. He is invested in a lot of companies and he even admits he makes mistakes such as buying COP when oil was at peak in summer. He is also the one who invested in Level 3 Communication (LVLT), a stock that is worth $1 now when it used to be worth $100.
California tobacco class-action suit reinstated
Mon May 18, 2009 4:19pm EDT
LOS ANGELES, May 18 (Reuters) - California's Supreme Court ruled on Monday that a long-running class-action lawsuit against major cigarette makers can go ahead, after being effectively halted by a lower court.
The suit, originally brought in 1997, alleges that major tobacco companies, industry groups and a public relations firm engaged in a "decades-long campaign of deceptive advertising and misleading statements" about cigarettes, addiction and disease.
The defendants include Altria Group Inc's (MO.N) Philip Morris USA unit; Reynolds American Inc's (RAI.N) R.J. Reynolds Tobacco Co; rival cigarette maker Lorillard Inc (LO.N); and public relations firm Hill and Knowlton Inc, owned by WPP Plc (WPP.L).
Under a change in California law in 2004, designed to curb excessive class-action lawsuits against corporations, California made it more difficult to form a class-action suit, by demanding that each member of the suit demonstrate personal damage or loss of money caused by the alleged fraud.
In light of the new law, California's Court of Appeal backed the defendants' demand to decertify the class-action lawsuit, meaning each plaintiff would have to file suit separately, greatly diminishing the impact of the legal action.
On Monday, the state's Supreme Court reversed that decision on a majority 4-3 verdict, meaning that the class action suit can proceed.
"We conclude that standing requirements are applicable only to the class representatives, and not all absent class members," the court's ruling said, meaning that only a handful of plaintiffs leading the suit must show proof of damage and deception, not all plaintiffs in the suit. (Reporting by Bill Rigby; Editing by Richard Chang)
On May 18 11:42 PM consumeronstrike wrote:
> Hmmmm.....