Choose Phillip Morris, Not Altria 20 comments
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I've gotten plenty of ridicule by saying Altria (MO) is nothing short of a value trap, but most have not criticized my analysis. I do, however, prefer PM (Phillip Morris International); thus because opportunity cost plays such a large role in the investing world, I see no reason to buy MO. Sure it has a great dividend, but so does PM, which announced it will return 9 billion to shareholders this year and most likely increase its payout ratio. But PM also has the following advantages:
- Long term growth potential, as there still remains enormous room for market penetration around the world as opposed to MO which is struggling to grow at all and has now had to turn to smokeless tobacco.
- I believe inflation will be a problem given the fact that the monetary base, M2, and money with zero maturity, have more than doubled since 2000, enormous deficit spending is taking place, U.S debt and the interest to service that debt is growing out of control. Unfunded liabilities just in healthcare (social security, medicare, medicaid) will be 956 billion in 2010, doubling in 2018-2019. 20th century hyperinflations i.e Germany, various Latin American and the most recent example in Zimbabwe, all shared one important characteristic: Debt To GDP averaged 52%. In 2010 the Ratio will be 45%! We are bankrupt people!.... We have managed to hang on due the irrational confidence in our paper money, but that is barely hanging on by a thread. Even in GDP rebounds immediately to mid single digits, it is impossible to make a dent in the national debt.
- PM has a very diverse set of currencies, negating significant currency risk, as opposed to MO which is reliant on the USD - the same dollar which has depreciated 95% since 1913. PM also has the potential catalyst to boost operating margins when China completely removes their peg from the dollar. This is only a matter of time, and it can't be too far off when China and other countries such as Brazil agree to trade using the Yuan and Real, unofficially removing the USD as the reserve currency. If the inflation scenario happens to play out even to a moderate degree, PM will be paying down its debt in depreciated dollars.
- Obama will likely increase excise taxes, as America desperately needs money, which would makes it harder to maintain profit margins.
Sure there can be money made in MO, but I think over a 5 year time horizon it will be its international counterpart that shines. Rarely do you see an equity trading at a deep discount to its Intrinsic value that has long term growth potential and has a very respectible 5.1% dividend.
Disclosure: No ownership of PM or MO.
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This article has 20 comments:
You also have multiple spelling errors so maybe 5 minutes is too short to properly give investment suggestions?
(1) The word "authors" is not spelled with an apostrophe unless you're using it to refer to something that belongs to the author (e.g. the author's pen) or unless you're using it as a contraction, generally for the phrase "author is" (e.g. that author's crazy). In fact, only very rarely is it the case that the use of an apostrophe is necessary or even a good idea except for purposes of indicating possession or indicating a contraction. I'm really not sure what is it with this thing about adding apostrophes in words for no reason, but it's a troubling phenomenon I've seen around the web a lot lately, especially when a word ends in the letter "s."
(2) In a critique of someone's spelling, a bizarre mistake like inserting an apostrophe in a word for no apparent reason is, well, a bit odd, to say the least.
I also want to say that I know plenty of very smart people who for whatever reason do not spell well, often when they are trying to write very quickly, and sometimes because they just aren't that good at it and don't care as long as they are close enough to get their ideas across. I have noticed that you often see this kind of thing in people who are fluent in multiple languages--and studies do show that the more languages you know, the worse your vocabulary is likely to be relative to the single-language speaker in whatever language you're talking about, and I would think there is a positive correlation between vocabulary and spelling ability. In other words, it seems like it's probably the case that the brain has only so much room for word memory.
I doubt it makes much sense to impeach someone's credibility as to the contents of a writing solely on the basis of spelling errors, unless of course the contents of that writing involve a spelling critique.
I'm not holding MO or PM, and would recommend neither at this time.
On Jul 06 10:39 AM naidle wrote:
> Why did you write this as if your opinion is contrary to the norm?
> I rarely, if ever, see author's suggesting Altria over PM.
>
> You also have multiple spelling errors so maybe 5 minutes is too
> short to properly give investment suggestions?
The Fiat Currency Disease
"Yesterday the Federal Reserve completed the latest meeting of its Federal Open Market Committee. It re-affirmed its plan to purchase by the end of the year some $1.8 trillion – yes, $1.8 trillion – of US government paper, comprising of agency debt, agency mortgage-backed securities and US Treasuries. That’s nearly $6,000 for every man, woman and child in the United States.
While $1.8 trillion is a gargantuan amount of money, the actual amount is of secondary importance to the essential, piercing question. Namely, where is this $1.8 trillion going to come from?
The answer is not pretty. These dollars will come from the same place that all other dollars are created these days, namely, out of thin air. Here’s how Mr. Bernanke explained this monetary sleight-of-hand before he was appointed as chairman of the Federal Reserve. “The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.”
Like most central banker statements, this one is based on half-truths. How can there possibly be “essentially no cost” to creating all these dollars? We all know that there is no free lunch in the real world, so there must be some significant cost to creating so many dollars, right?
Please read Mr. Bernanke’s statement again. There may be essentially no cost to the US government, but here is what he doesn’t tell you. There is a very real and huge cost to everyone who ends up holding these dollars that were created ‘out of thin air’. It is the cost of inflation; it is the onerous cost burden arising from the reality that the purchasing power of the dollar is being continuously eroded. And the more dollars that are created beyond the need for dollars in normal commerce, the worst the inflation becomes. The $1.8 trillion the Federal Reserve will soon be creating should cause those remaining deflationists still arguing their point of view to recognize that they are looking down the wrong road.
They argue that deflation is inevitable because credit is contracting. However, contracting credit is not deflation. Rather, contracting credit causes wealth destruction, but does not necessarily cause deflation in a fiat currency world.
Deflation arises when the quantity of dollars contracts, as it did when credit contracted in the Great Depression. But the quantity of dollars is not contracting today. It continues to grow, regardless what measure one uses, M1, M2 or M3 (which John Williams of www.shadowstats.com estimates to have grown +7.3% over the past 12 months).
Percent change at seasonally adjusted annual rate
M1
M2
3 Months from Feb 2009 TO May 2009
9.4
4.2
6 Months from Nov 2008 TO May 2009
9.5
9.5
12 Months from May 2008 TO May 2009
16.2
9.0
Source: www.federalreserve.gov...
What’s more, the trillions of dollars created out of thin air for various bailout schemes as well as this latest $1.8 trillion planned purchase by the Federal Reserve will make sure that the quantity of dollars continues to grow. The result will be that the purchasing power of the dollar will continue to be inflated away.
It has become increasingly apparent that the US dollar has caught the fiat currency disease, where too many units of account are created. This disease is fatal, and hundreds of fiat currencies buried in the fiat currency graveyard throughout history have succumbed to it.
By creating too many units of account out of thin air, the Federal Reserve has sealed the dollar’s inflationary fate. Own gold and/or silver to protect yourself and your family from this inevitable outcome.
by James Turk
I'm not saying one is better than the other. I own both, have owned both for over a decade. They are both great. If MO's earnings multiple was equal to PM's I'd sell it. It's not. MO is priced as if it will never grow again. MO's dividend alone plus price appreciation of 16 cents annually will equal the markets long term average return of 9%. This assumes they don't increase the dividend, and I would be shocked if they didn't increase it next month, the last Wednesday in August when the board meets. I recently bought my 3 year old daugher a single share of MO. By the time she even knows what that means, the dividend alone will be more than today's stock price.
I hope that SeekingAlpha doesn't become like Motley Fool: a bunch of investment dribble masquerading as advice when it is really a come-on to subscribe to someone's newsletter or blog.
Besides, has anyone noticed how MO is a great diversifier? A lot of days it won't move with the general market at all, it's got a mind of it's own it seems like.
Regarding intelligent people who are poor spellers - you're missing the point but I agree. Investment advisers should inherently be detail oriented. If that's not a big deal to you then we're just from a different branch on the tree.
On Jul 06 11:32 AM User 426151 wrote:
> I'd like to make two points regarding naidle's recent post:
>
> (1) The word "authors" is not spelled with an apostrophe unless you're
> using it to refer to something that belongs to the author (e.g. the
> author's pen) or unless you're using it as a contraction, generally
> for the phrase "author is" (e.g. that author's crazy). In fact,
> only very rarely is it the case that the use of an apostrophe is
> necessary or even a good idea except for purposes of indicating possession
> or indicating a contraction. I'm really not sure what is it with
> this thing about adding apostrophes in words for no reason, but it's
> a troubling phenomenon I've seen around the web a lot lately, especially
> when a word ends in the letter "s."
>
> (2) In a critique of someone's spelling, a bizarre mistake like inserting
> an apostrophe in a word for no apparent reason is, well, a bit odd,
> to say the least.
>
> I also want to say that I know plenty of very smart people who for
> whatever reason do not spell well, often when they are trying to
> write very quickly, and sometimes because they just aren't that good
> at it and don't care as long as they are close enough to get their
> ideas across. I have noticed that you often see this kind of thing
> in people who are fluent in multiple languages--and studies do show
> that the more languages you know, the worse your vocabulary is likely
> to be relative to the single-language speaker in whatever language
> you're talking about, and I would think there is a positive correlation
> between vocabulary and spelling ability. In other words, it seems
> like it's probably the case that the brain has only so much room
> for word memory.
>
> I doubt it makes much sense to impeach someone's credibility as to
> the contents of a writing solely on the basis of spelling errors,
> unless of course the contents of that writing involve a spelling
> critique.
>
> I'm not holding MO or PM, and would recommend neither at this time.
>
Don't look in the mirror and believe that it is a picture of everyone!
I guess I have debated the merits of these two companies for a very long time. My only conclusion seems to be that it isn't which company but at what price. MO was/is the low hanging fruit for government revenue generation.
When other nations jump on the same bandwagon, using tobacco taxes to make up for reckless spending in other areas, the primary target will be the largest and most "foreign" company that can be found. Obviously, PM will be the primary target. After all, who would have thought that Paris would ban smoking in certain areas.
MO has been given the guarantee of monopoly power with backing state attorney general enforcement and Federal government health regulators. Future lawsuits will not be allowed to impinge on MO's ability to continue making the MSA payments. Although not a sure thing, MO offers fewer unknowns.
I see no need to point out the redeeming attributes of PM since you already covered that area. However, I would like to point out that a depreciating currency only affects trade across borders not domestically. Also, since most items are traded in dollars the decline in the dollar will result in even greater declines in other currencies until world trade gets off the dollar system. The means the PM is most affected by disparities in the rise and fall of local currencies.
Again, the primary issues is, at what price are we to buy either company? Your comparision of MO and PM was good since both are of the highest quality with comensurate high governmental risk.
Great post. Here's my thought on the whole currency issue.
I questioned when you say "negating significant currency risk" because I saw a different outcome when many firms when out of business due to wrong "hedge" they took on the Korean won. I'm sure PM has a sophisticated team or broker they deal with and thus this scenario is probably less likely. Frankly if MO cost is in US$ and revenue is in US$, I see nothing wrong.
On the earning and yield side.
MO is expected to grow 7% compares to PM at 14%
Yield on MO is at 8% compares to PM at 5%
If EPS growth comes true, then you would have MO at 15% upside compares to PM at 19%.
I have concern for PM price because it is trading at 13.7x compares to MO 9.5x P/E. That's 44% premium! If PM falls short of expectation, it would really hurt the stock.
As long as you pay the right price, both companies are great. I do own MO right now but I would low to own PM at P/E below 10.
Great work.