When buying a stock for the long haul, looking for long-term trends only makes sense. If people are starting to drink less Coke, then Coca-Cola (KO) is going to be considerably less attractive for the long haul. If people are switching from land phones to mobile phones, then investing in a company that focuses exclusively on those land phones is suddenly a pretty rough idea for the long haul.
When it comes to US tobacco investments like Altria (MO), what's the greatest long-term trend that is a huge risk? That people smoke less -- considerably less. And that's what we'll be analyzing here.
The Legal Risks Of Taxes And Regulations
Just recently, US tobacco companies had a huge victory in terms of free speech. The FDA tried to get them to put absurdly obnoxious "warning" labels on the packages to discourage the notion of tobacco being "cool" or something along those lines.
While regulations on smoking are disturbing from a personal liberty approach (I smoke cigars, and if they ban cigarettes, it's only a matter of time before cigars are impacted as well), it's even more disturbing from an investment approach. Here's a list of anti-tobacco moves and regulations that are getting worse by the decade:
- Tobacco Taxes. A huge tax boom for tobacco has led to a historical drop in tobacco consumption. That's bad, but it's happening. Unavoidable. Over 3,000,000 fewer people smoke than in 2009... even though our population is larger. That's a huge, huge paradigm shift for tobacco investors.
- Tobacco Bans. My state was one of the first to ban smoking in a public restaurant. I think it's a violation of choice (people who don't like smoke can just eat somewhere else). Either way, it's made it much more difficult for people to even regularly smoke in public. It's all part of a decades-long anti-smoking campaign that's finally paying dividends for the activists. Of course, the biggest risk is an outright ban. There's been a little chatter about it, but nothing substantial yet.
- Tobacco Regulations. Regulations are getting stronger for tobacco, and they could continue to get stronger. Where you're allowed to smoke, what you're allowed to smoke, a ban on clove cigs -- it's all getting worse. And it'll probably keep getting worse.
The Trend Is Against Smoking
There are millions fewer smokers than just in 2009, even while the population grows. And this isn't just a short-term shift -- this is a long-term shift.
Smokers don't even smoke as much as they used to. Most smokers smoke less than a pack a day -- far less smoking than ever before. Just look at this Gallup poll -- it's disconcerting for the long-term Altria investor.
What Is Altria Doing About This?
Altria has been getting more and more into the tobacco-less route, even helping sell products to help people stop smoking. This might be fine in the short-term, but this is essentially the same as killing the goose that lays the golden eggs.
They're also still contributing to the tobacco lobby. There's a chance a Romney win could somehow change the tide, but I highly doubt it. This isn't one of those things Romney would want to waste political capital one -- there are bigger fish to fry. That's assuming he wins, and there's no telling at this point.
Is It A Sell Or A Hold?
Don't get me wrong, the company is still making plenty of money right now. Their revenue growth has slowed slightly, even as the overall industry is making more money than from a few years back. But there's no way around the fact that in the long term, it's going to be difficult for them to keep up a strong level of growth with current trends. That's why the price has been falling over the last week rather than keeping up with the stock market in general.
For the long-term investor, Altria is a hold at best -- and there are probably other tobacco companies internationally that offer more diversification and a growing consumer base than US tobacco. Philip Morris International (PM) is a good example. In the meantime, enjoy the juicy high-yield dividend payments.