For several years, we have been forced to manage money beneath the structured establishment of a new world order. Interest rates on all savings and fixed income investments are a pathetic joke. With rates at zero, any uptick in inflation guarantees negative real returns for your portfolio. On a daily basis, we are (mis)treated to a steady parade of stimulus packages, bailouts, and Central Bank helicopter lifts of cheap money throughout the industrialized world. At present, the 10-year Treasury yield stands at 1.658 percent, a 60-year low, as investors flee chaotic European contagion in exchange for safety.
Meanwhile, Altria (NYSE:MO) has quietly enjoyed a bull market of its own, as shares have more than doubled from $15 to $32 over the past three years amid economic chaos. Certainly, Altria is some newfangled hipster Silicon Valley technology-company, right?
Altria is a stodgy American Marlboro cigarette maker and Miller beer distributor. Altria's declining businesses operate beneath the specter of looming multi-million dollar lawsuits, and management can only grow profits through ruthless efficiency and cost cutting. Altria, however, is legendary for its dividend payments. At present, Altria carries a 5.1-percent dividend yield, after it paid out $3.22 billion in dividends of its $3.39 billion 2011 profits. Each year, Altria targets a dividend payout ratio of at least 80-percent - to return the bulk of its profits back to shareholders.
Although Altria has proven its merits as a story stock, fundamental analysis will prove that its share price has long exceeded reasonable valuations for the underlying business. Altria is a 10-year Treasury Note in disguise, and investors must strategize accordingly.
The Federal Reserve Board
In 1913, Congress established the Federal Reserve System as an apolitical entity that is obligated to sustain a contradictory dual mandate of full employment and a stable price level for the U.S. economy. The Federal Reserve Board helps to manage the U.S. economy through its monetary policy. The Fed sets banking reserve requirements and discount window interest rates as a lender of last resort - to influence all benchmark interest rates. In recession, the Federal Reserve Board will accommodate a low interest rate regime, in order to encourage private consumers and institutions to take out loans, invest capital, and ultimately, stimulate the economy.
U.S. Fed watchers must also note that our banking, insurance, and real estate sectors account for roughly 20 percent of total gross domestic product. As a whole, the financial industry wields tremendous power, where it is too big to fail. In America, bank failure would obviously precipitate commercial and social collapse, which would threaten to destroy the very fabric of Western Civilization.
Sheer logic would have us reason that Federal Reserve monetary policy will remain favorable to financials, as they represent our primary economic engines, for better or for worse. Low interest rates help the Big Banks butter their bread through the carry trade, as they borrow short-term cash on the cheap and lend it back out over the long-term at a profit. At the moment, the Big Banks hold all the cards, so we can expect this cheap money regime to reign supreme well into the foreseeable future.
Super investor Peter Lynch highlights a price-to-earnings / growth ratio of one - to identify an investment that is fairly valued. This means that a corporation growing earnings at 20 percent annually would be reasonably priced at 20 times earnings. At today's $31, Altria trades at 19 times earnings, although this is clearly a zero-growth business. During 2008, Altria posted $3.1 billion in net income, before posting $3.4 billion in net income for 2011. In ordinary times, Altria would trade for no more than five to ten times earnings, or for less than half of its current price.
Ironically, Altria, a cigarette maker, is a recessionary bubble stock. Altria investors unwittingly benefit from cheap money policy, as shares are far removed from fundamental reality. It remains painfully obvious that desperate savers are throwing cash at Altria for yield, alone.
Nominally, Altria stock largely performs within a parallel universe away from global economic trends. Expect Altria share prices to collapse amid irrational exuberance for the overall stock market. Bullish growth would signal a strong economy, which would then force The Fed to raise rates and contain inflation. At that point, investment capital would flow out of conservative Altria shares and into aggressive technology and cyclical names, such as Intel and Caterpillar. Meanwhile, neighborhood checking accounts and U.S. Treasuries would beckon as safer alternatives for savers to park cash in comparison to Altria stock. As evidence of this trend, Altria share prices (before Kraft and Philip Morris International spinoffs) went into a freefall in 1999, amid the tail end of the dot-com boom and tightening monetary policy.
I, however, doubt that we will be Partying Like it's 1999 anytime soon.
Disclosure: I am long MO.