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Altria: 5 Reasons To Buy

Jan. 22, 2018 11:05 AM ETAltria Group, Inc. (MO)PG58 Comments
Khojinur Usmonov profile picture
Khojinur Usmonov


  • Altria's core business of smokeable products has the highest market share in the United States, more than any of its competitors.
  • The company is trying to diversify its portfolio as its customer base burns.
  • Altria stands to benefit the most from the tax reform bill, which the company can use to reward shareholders or further diversify its cash flow.
  • MO's volatility is relatively lower, mainly thanks to a strong balance sheet.
  • Since the spin-off, Philip Morris International became more mature and the exes might get back together.

Forgive me, Father, for I have sinned. I invested in a sin company, specifically the Big Tobacco.

Over the path month, I have been researching consumer goods companies. Initially, I believed I was going to invest in a recession-proof company like Procter & Gamble (PG) or Clorox (CLX). Not even close. I'm going to be a bad boy, set aside the social responsibility consequences, and invest in a sin stock. As Gordon Gekko said in the famous "Wall Street" movie, "greed is good."

The addictive nature of cigarettes helps make its sales insensitive to a rise in the product price, stricter regulations, or a recession. In other words, the inelastic nature of cigarettes helps the Big Tobacco companies maintain relatively stable earnings.

Out of all industries, tobacco is the best performer since the 1900s. "After 1965, when the health impact of tobacco became well known, US tobacco companies outperformed comparable firms by more than +3% per year over the period 1965-2006. Moreover, even though US tobacco companies faced a barrage of litigation during this period, they outperformed their international peers," Credit Suisse stated in its 2015 Global Investment Returns Yearbook.

Yes I know, "past performance is not indicative of future performance." Based on my research, I'm going to go ahead and invest in the tobacco industry with significant barriers to entry. I'm investing in Altria Group (NYSE:MO) for the following 5 reasons*:

* = I'm using my mental model of weighted criteria to make this investment decision (don't laugh)

1) Core Business - Smokeable Products (25% weight)

Despite shrinking U.S. smoking population, Altria's earnings have continued to grow and grow. The smoking rate fell from 42% of the US adults in 1965 to 15% in 2015, an all-time low. From 1990 to 2015, Altria's net income grew 48%, as the

This article was written by

Khojinur Usmonov profile picture
Forex, equities and futures trader. FX fund manager. I started trading at 15 after discovering a love for financial markets and research. I like reading financial statements and SEC filings. (Don’t ask me why). These days I write about securities, macroeconomics, real estate, finance, and investment ideas. In addition to running a FX fund, I also trade equities and futures. I run the website www.outofWACC.com where I cover macroeconomics and investment tips. “An investment in knowledge pays the best interest.” – Benjamin Franklin (The face of the $100 bill, of course.)

Analyst’s Disclosure: I am/we are long MO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

All the data comes from Altria and Philip Morris's investor relations website, S&P Capital IQ, Finviz, Portfolio Visualizer, and few websites which are linked in the article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (58)

somedata1 profile picture
Sentiment is not on MO and PM side. I know I know. I have been through tough that with Gilead.
mo_strategist profile picture
You mean FDA sentiment? Of course not. The FDA TPSAC was stuffed with individuals who have made professional careers out of anti-tobacco research and activity. I think it was plain before that panel even met (and I said so beforehand) that it would be a "tough sell".

On the other hand, the FDA has to be pragmatic here. The FDA head put out a stated plan of switching everyone to lower risk products and said explicitly what everyone knows. . .that these vape based products are safer than ordinary cigarettes. Kind of hard to see how he's going to get his plan in action if the FDA rejects every single electronic nicotine system market approval request.

I can see not giving IQOS reduced risk status. Burden of proof there was set high (IMO probably too high. . .that's a different issue/question), and that was always going to be a tough hurdle. But blocking IQOS from the marketplace would probably eventually boomerang and hurt the FDA.

Again, IQOS, right now, is probably the #1 most used reduced risk product on the planet in terms of volume/user base. Its got, by far, the most scientific data showing relative safety vs standard cigarettes. Even the FDA scientific panel conceded that the data showing lower toxic exposure was sound. If the FDA does not let this product into the market via the PMTA (non reduced risk) pathway, its not going to be able to let *ANY* electronic product in, because none of them have anywhere near the safety data that PM does.

Instead, the FDA will effectively be enforcing a ban on EVERY electronic cigarette, EVERY vape based device, and EVERY HNB product like IQOS. Not only is that not what the FDA head says he wants to do, but I don't think the public is going to go for that either. The FDA itself would be held under the microscope and its not going to like that.

Given that the FDA has already allowed in one new product category (snus) via PMTA, I think its pretty likely to allow in IQOS too. That's basically just a question of time.
allenmccabe profile picture
I was looking for a good reason to get back on the MO train; you gave me 5, thanks! Opened a new position yesterday.
Buyandhold 2012 profile picture
"Forgive me ,Father, for a have sinned. I invested in a sin company, specifically the Big Tobacco."

Thank God I started sinning in 1970 and invested in Philip Morris. I even bought more shares over the years whenever it appeared to be cheap.

I read that the average annual return on Philip Morris since 1970 has been about 20%.

Now Philip Morris, Altria, Kraft Heinz and Mondelez are about 20% of my total portfolio of 39 stocks.

It sure as hell pays to sin in the stock market. And making money is fun.

CALPERS apparently doesn't like to sin and sold all of its tobacco stocks.

Selling a great investment like the tobacco stocks. Now that's a real sin.
sirfatboy2014 profile picture
MO Money! $$$
mo_strategist profile picture
Ah, so-called "socially responsible" (politically correct cowardly) investing. See here for why this is harmful for those who engage it in: https://seekingalpha.c...

The main point of this form of investing is to screw stakeholders out of potential return to satisfy loud complaints by puritans.

As more food for thought, here's why, if you think cigarette companies are "evil" you are MORALLY OBLIGATED to own cigarette stock:


And lastly, why smoking is a public service, and why, if you think smoking is terrible, you should be supporting Altria/PM: http://bit.ly/2F5kfFC
MO is an amazing company, I worked for,them for a short period of time until I retired. Very well structured and takes care of its employees extremely well. With such negative publicity they still manage to make a healthy profit each year. Amazing.
Of course these new smokeless products are revolutionary but I think the elephant in the room is the legalized pot reality. Can you imagine what would happen if MO and other big tobacco companies start mass producing pot, and it's only a matter of time.
I would buy on any kind of dip,
"Father forgive me for I have sinned."

I absolve you. I can do that because I am a Catholic priest. I'm also an Altria shareholder.
22 Jan. 2018
All that’s well and good, but what happens if Commissioner Gottlieb and the FDA order that all traditional cigarettes shall reduce their nicotine levels to non addictive levels, and do not approve IQOS as a reduced risk product, or worse yet, fail to approve it for sale in the US?
arthur_bishop1972 profile picture
"They shoot us."

---Val Kilmer in 'Real Genius'
FinancialPadishah profile picture
That will never happen. Big tobacco is a major funding machine for all 50 States. Tobacco and Government bed-sharing is just one more political dirty little secret.
mo_strategist profile picture
That would be like ordering unicorns to come and bring him lunch. Nicotine is an addictive substance. The only "non addictive" nicotine levels are probably zero. This is like ordering Budweiser to market non-addictive beer. . .its exists (its called "O Douls"). . .just nobody wants to buy it!

Furthermore, the FDA lacks the regulatory authority to a. lower nicotine levels to the point where cigarettes are destroyed as a product category, or b. require manufacturers to manufacture product that can't be made. IE, I don't think there is currently commercially available quantity of low nicotine tobacco to do this, even if the tobacco companies wanted to do it.

In practice, before the FDA can do this, its going to need to go through a formal process evaluating data to justify this swap, including probable effect on black market cigarette sales. As a matter of public policy, forcing cigarettes to contain negligible nicotine is questionable, if you're going to permit nicotine to remain legally in the marketplace.

Lastly IOQS could be approved for sale without qualifying as a reduced risk product. It will still be on shelves, just MO won't be able to legally claim is safer.
Scott Kennedy profile picture
Hi Khojinur,

I believe this is a very informative and useful article. Your analysis covered multiple MO product lines and provided very good information from different sources.

Thanks for taking the time out (I'm assuming multiple hours) to compile this data and present it to the S.A. community. I also appreciate the quick reference / link to my latest MO article.

Dividends#1 profile picture
Khojinur Usmonov,

Excellent article!

Keep adding to your MO position, my strong suggestion!!!
Right on,Div1;PM & MO have been the best damn stocks I have owned for 32 years. Also have done well in the last 2 years with BTI & VGR.
Like VGR also for the dividend -- stock trades sideways. Maybe it's the real estate division holding the stock down.
Sin stock make money right or wrong its up to ones own decision.
People dont have to buy there products but chose to do so.
Smoking is bad drinking is bad people still do it.
It's there choice to use it and our choice ti invest in it. These companies are regulated and people know the issues with there products and still use them
With all of the legalization of MJ no one is talking about the issues that will be happening in the future health issues.
Long Mo !!
All the major tobacco stocks are great holds. Sin stocks have been in for as long as I've been investing and that is quite long !
Long MO here. Maybe the only benefit to our current immigration policy is that we're bringing in lots of people who like to smoke more than Americans do. It's odd how no one talks about this. If I was Altria I'd be in Dick Durbin's corner all the way. And it's Gekko, not Gecko.
FinancialPadishah profile picture
Interesting comment. Never thought about that!
23 Jan. 2018
Good point. Smoking is growing inside the USA too.
Khojinur Usmonov profile picture
Hi Kenneth,

Interesting thought. However, I saw an opposite data on this. According to one study, the smoking prevalence among migrants is consistently lower than both of the country of origin levels and the US level.

"The prevalence of smoking among migrants (men: 14.2%, women: 4.1%) was lower than both the US-born group (men: 21.4%, women: 18.1%)"

Source: http://bit.ly/2G6w6V4

A different study which supports your thought in a way says this, "The findings also demonstrated that smoking increases in both prevalence and frequency with the duration of US residence among Asian immigrants. Among Latino immigrants, smoking only increased in frequency. Furthermore, the researchers found that, regardless of the amount of time spent in the United States, immigrants who form strong connections, such as English language proficiency and citizenship acquisition, benefit from reduced smoking. They noted that the reason may be because these immigrants are less stressed and have higher socioeconomic standing."

Source: http://bit.ly/2F9oD6y
22 Jan. 2018
Smoking is as popular as ever in Europe, Asia, and basically everywhere other than the USA. Even doctors and nurses smoke in Europe. It is absolutely commonplace like it hasn't been in the USA since the 1970's.

I hold a long position in MO and it has been good to me.
Growtheport profile picture
@RWDS. Well, it hasn't been good for others.

Tobbaco products kills seven million people every year and costs society $2 trillion annually in medical expenses. The industry uses child labour in the production of its product, is blacklisted as an investment by governments who are signatories to the United Nations Tobacco Treaty, and it's future profitability faces material legislative, regulatory, and litigation risks.

Ugh. It's really hard to understand how most of you who post here so casually make remarks about smokers and the impact of smoking.
Or maybe it's in the financial interests of some "ethical investing" consultants to demonize MO and then ring the register. "Oh hey we don't like MO, let's put you in TSLA, a much more ethical company." LOL.
millions of people get killed in car accidents each year...should I sell my auto stocks...millions die from drinking alcohol each year should I sell those stocks.. where do you draw the line..especially when this genre of stocks are your best performers....
the conservative speculator profile picture
good read, thanks. I have a large MO position , looking to add PM if the price becomes more attractive.
Potential growth catalyst... cannabis?
Khojinur Usmonov profile picture
The U.S. marijuana market is about 6 times smaller than the US tobacco market. But, it is expected to grow in double digits over the coming years. While the trend is towards the legalization of marijuana is in place, like most people, I have no doubt companies like Big Tobacco would want to get involved, but it's too early for me to speculate if and if so when Altria will get involved. The management knows what it's doing it and I will leave it up to them whatever if they want to enter the market or not. At the time I invested in MO, I did not take into the account of Altria's potential entry into marijuana market.

One thing I find interesting is that the effective tax rate for marijuana products are about 20%, while for cigarettes it is from 50 to 120%. With the lobbying power Altria has, they can push for higher taxes to discourage competition, especially from smaller players. 

On the other hand, more extensive regulations and taxes will encourage black market transactions.

They can also try to discourage competition by supporting strong testings before products can be launched. The amount of capital needed to finance the testings, etc would discourage some competition. 

Tax rate source: http://bit.ly/2GcwzFo
Purchasing MO is exactly what I agree with; however it is not as popular as it should be,visavie BTI.
arthur_bishop1972 profile picture

I don't believe this is correct, even if FX aren't right. I know BTI's payout ratio is lower, around 65%, and they are switching to quarterly dividends this year. I believe they will announce how much on Feb 1, or thereabouts.
PACKER man profile picture
Long MO and PM; any product that is so protected from rationality (smoking does KILL) and can raise its prices at will for an addiction product is a STRONG BUY for me and has been :)
Great article indeed. And fact-based. I am long MO, PM, BAT and VGR. I have never smoked anything. But sin stocks do pay well.
Glen Easton profile picture
Have both PM & MO.
Altria is a well run Company with a strong history of proving excellent returns for it’s shareholders. In a free society men and women once presented with the basic facts should be allowed to make their own choices. Anyone believing that the government cares one iota about their well being should have their head examined. They can’t even agree on passing a budget to keep our government running. To make things even worse once they finally do pass a budget the first thing they will do is pay everyone retroactively currently sitting at home.
So we the citizens wind up paying once again for absolutely nothing.
jerryjc5 profile picture
Great comment njja, spot on.
cdostrom profile picture
Some government workers are sitting at home. Others (hint: our troups) are risking their lives to keep us safe, all while not getting paid. Shame on Schumer.
Boo. Republicans have both House & Senate majorities, and a President who cannot decide what he wants for a spending bill.

Also, to be clear - our active troops are EARNING their pay - they will be fully paid once the shutdown is over. Only part-time (Reserve & National Guard) are not earning pay.
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