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Is Altria Headed For A Big Fall On New Regulations?

Apr. 03, 2018 6:34 PM ETAltria Group, Inc. (MO)BUD103 Comments
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  • The Food and Drug Administration is looking to set a maximum nicotine level in cigarettes.
  • The FDA is also looking to create new rules on menthol tobacco.
  • The FDA is also pursuing revised rules for e-cigs.
  • Will this spell the end of Altria as we know it? Not likely.

By The Valuentum Team

We’ve liked Altria (NYSE:MO) for a long time. Way back in October 2011, we wrote that "Altria Is a Dividend Seeker’s Dream." At the time, we thought the company had “over 25% valuation upside,” and the stock has more-than-delivered since then. Altria has a nice recurring revenue stream thanks in part to the addictive nature of its products, and it boasts a solid dividend yield (4.5%+) that remains comfortably above that of the competing 10-year Treasury yield.

What has made Altria such a fascinating idea in years past, however, has ironically been the threat of regulation, which has acted as a ballast to shares, allowing investors to continue to reinvest dividends, further compounding returns. The stock, as a result, has worked wonders for many retiree accounts. From Marlboro to Copenhagen to Skoal, Altria’s brand portfolio is among the best in Big Tobacco. The company has been able to handle declines in the cigarette category quite well, too.

But what has been happening of late? Having jumped to the mid-$70s per share in mid-2017, Altria’s stock is stuck in the doldrums. Could it be a function of more socially-conscious investing, with large funds selling “sin" stocks? Is it because of shifting millennial preferences? Or something else? The concern for investors in Altria’s shares has always been whether this time is different. Will regulation finally end Altria’s profitable business model? Will investors finally say "no more" and run away from its equity?

A Hugely Profitable Business Model

Image Source: Altria

Very few companies can put up the type of operating margins that Altria can. At a 41.2% adjusted operating-income margin for its Smokeable Products division during 2017, Altria was already turning heads, but during the past 5 years, the company has expanded the division’s profitability by 10 percentage points thanks in part to

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Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

MO is included in Valuentum's simulated newsletter portfolios.

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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