Retirement Strategy: You Don't Have To Be A Smoker To Own Altria

Summary

• The first addition to PRIP is a company that has been going out of business for 40 years!
• This company has made dividend-growth investors very happy with a track record of 50 consecutive years of dividend paying and increasing.
• Yes, fewer folks are smoking, but the fundamentals are simply too strong to ignore.

Smoking Is Awful For Your Health But Great For Your Dividend Growth Income

Smoking is bad for your health but Altria (NYSE:MO) has been great for dividend growth investors for over half a century. On the other hand, the company has been declared "dead" for over 40 years. As cigarette smoking has declined in the USA as well as globally, Altria has had to broaden its reach to consumers as it works continuously to come up with safer alternatives.

• Nicotine pouches
• Oral nicotine products
• Potential and current mergers
• Large investment in Cronos

The company has also implemented a 10-year plan to not only sustain, but to grow:

Our 10-Year Vision: Responsibly lead the transition of adult smokers to a non-combustible future.

The point is that based on the current fundamentals, adding MO to the new "Pandemic Retirement Income Portfolio" offers a unique opportunity to own an enormous company that has outstanding fundamentals at a price that might just offer a potential of a 35-40% capital appreciation based on its current price of about $39/share up to its 52 week high of about $52/share.

While that is not a given, the raw fundamentals show that the stock is seriously undervalued at its current price.

Here are a few simple charts to take a look at:

Data by YCharts

Data by YCharts

Data by YCharts

These first three charts show the share price drop and recovery from the low of about $32/share. But based on the fundamentals, the stock is oversold and undervalued.

The second chart shows that the dividend currently being paid annually is $3.32/share at a current yield of 8.39%. I can recall that back in the late 1980s and early 1990s the company faced lawsuits from around the nation that could have bankrupted the company, but didn't. The company persevered, and whether you agree with it or not, it has been turning the corner ever since.

Most estimates place the current smoking population at between 25% and 30%, and it is my opinion that unless smoking is completely banned this will stand as a "base" of sorts, as those folks will probably never quit, no matter how much cigarettes cost or how much they are taxed. My take is that this core base sees smoking as a right and a freedom and even though they know the dangers, they choose to continue to smoke.

Notice in the third chart that the cash from operations has not changed very much over the last 52 weeks, when the share price was around $52/share. The company has nearly $8 billion in cash right now and that alone should keep the dividends flowing and increasing for years to come. My opinion is that the Dividend King status of MO will be safe for a long time. If the share price were $75, I would not buy it but at a current forward PE ratio of 9.19% and a forward EPS of $4.27/share, the cash will continue to flow and dividends will continue to to increase. Don't forget about the capital appreciation potential of 35%-40% as well over the next 12-18 months!

What About The Near Term?

Anyone can take a look at the Altria website to see precisely what the company has been doing. This huge company has not been just sitting back and cutting expenses. It has been investing in the future of smoking, and while e-cigarettes have come under fire, it is still a growing segment. The big potential is the marijuana legalization. It is no longer a matter of if but when.

MO has made a large investment in this area, and due to the economic power of the company, as well as its most popular brand (Marlboro) it is ready, willing and able to pounce heavily right into the entire cannabis sector.

Given the core base of current "forever smokers" as well as the investments into the future, MO is positioned to not just survive, but to thrive. I have not even mentioned the consolidation of the entire industry, which will mean Altria will have the power to determine which companies it wants to buy for itself.

Some MO bears love to talk about declining revenues and earnings. Well all you need to do is take a look at this:

Revenues and earnings have increased since 2010, while the cost of those revenues has declined. The numbers do not lie - they are the facts - and these facts are in the face of a seriously diminished smoking population.

The only thing I can see here is an opportunity for dividend growth investors to significantly increase their cash flow, as well as the potential capital appreciation.

The future of MO is strong and I would rate is as a buy right now, with a dividend king yield of once-in-an-era proportions.

Who Actually Holds Altria Shares?

In many cases, an investor should see what percentage of institutional ownership of shares are being held. The number of shares held by institutions can give you a clue as to the longer-term stability of the stock itself. According to this site, the numbers are simply outstanding:

Nearly 64% of all outstanding shares are currently held by large institutions such as mutual funds, ETFs, pension funds held by investment companies, and hedge funds. To me, this also is a confidence indicator of my opinion that, over the intermediate and longer term, MO will be a sound investment with the usual ups and downs of the market!

A Solid Addition To The "Pandemic Retirement Income Portfolio" or PRIP

The hypothetical new Pandemic Retirement Income Portfolio, or PRIP for short, consists of the following stocks right now:

Johnson & Johnson (JNJ), Procter & Gamble (PG), Microsoft (MSFT), Apple (OTC:APPL), AT&T (T), Walt Disney (DIS), PepsiCo Inc (PEP), Con Edison (ED), Exxon Mobil (XOM), and Realty Income (O), and as of today 6/2/2020, Altria (MO).

My Bottom Line

I realize that many individual investors are still writing the "obituary" for MO as well as all smoking-related investments. I owned MO for decades as the first "obituaries" were written.

Lawsuits, government regulations, advertising restrictions, as well as a drop in the smoking population: It is easy to see those risks and headwinds, and they still remain today!

That being said, the facts and fundamentals cannot and should not be ignored, so I would suggest you do your own research into this 50-year dividend king, and see if you think it belongs in your portfolio.

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.

Disclaimer: The opinions and the strategies of the author are not intended to ever be a recommendation to buy or sell a security. The strategy the author used in his past, worked for him, and it is for you to decide if it could benefit your financial future. Please remember to do your own research and know your risk tolerance.

Comments

[dickinkona]

My only comment here would be to just look at the stock price chart for the last three years. It's been a true roller-coaster, up and down, but the trend has continuously been down.. There appears to be no support level that it will not fall through. Fundamentals aside, I believe this stock is driven more by emotion, and the sentiment is and has been bad for a long time. Unless I see something substantive happen that will change this trend I will stay away. I'm not interested in a stock that pays a wonderful dividend by keeps dropping in value like MO has done.

[Sunshine123]

Very good article. Long MO, PM, BTI

[bullbobtoombs53]

For someone who is 67, i always enjoy your thoughts and insight, as I try to generate income for my retirement, and not touch the principle if possible. thank you for your free advice it is appreciated and followed.

[anxious]

Thank you . Your approach is helpful.

[sphill2]

I love reading what you write. You remind me of the guy next door or some other guy I would like to shoot the sh.. with. I never miss one of your articles as they are always interesting to me. I have bought and sold MO a few times over the years and your article reminded me to take another look. Thanks Regarded Solutions.

[swiftstroker]

U.S. Birthrates Fall to Record Low
Last year’s data are another sign of how American childbearing, which began declining during the 2007-09 recession, never fully rebounded......

[MarkMyjak]

I'm not a smoker, but I promote it. In my work travels I encounter smokers all the time. I encourage them to take their time with the cigarette. Then encourage them to light up another before we do business.

I would like to see a mutual fund that encompasses cigarettes, pharmaceuticals, pharmacies, alcohol, medical facilities and medical gases.

[Afzal Raza]

Yes I agree, and also prisons.

[desert_investor]

BINGO!!!

[citikid]

As I mentioned in a previous RS article, I’m reluctantly looking closer at tobacco after dismissing it for years due to my own personal and ethical struggle with investing in an addictive substance.

But in an irrational market you start to look for reason. And unfortunately tobacco is offering a rational economic option. Even if it is just another manifestation of the TINA debacle.

I’ve done some research on BTI and MO and although BTI looks better at a glance, I agree that MO is probably the better way to go.

In a world where Doctors are being allowed to do drive-by Botox injections during a pandemic, investing in MO no longer brings the same burden that it once did. For me anyway.

And there are conversations out there suggesting that tobacco users may be less likely to contract COVID-19 !

TINA told me it’s true !

Thanks for the insights RS !

[zubbub]

It's true, the company is not dead, only millions of consumers of its products are (mainly from lung cancer and other respiratory diseases). There are so many great companies out there. Why choose to own one that is egregiously harmful, including by addicting young people to its hazardous product? Yes, many companies are far from ethically perfect, but let's not confuse the issue: this company is ethically egregious.

[Regarded Solutions]

and financially awesome.

[VillageElder]

Yes, it is financially awesome. But it is also legal. That is to say government approved. And it is getting into the newly government approved marijuana market. ($$$) The government is licking its tax revenue chops over the potential future, steady, reliable, revenues. So how willing is the government to kill this golden (tobacco brown, actually) goose? I would suppose not very likely. That is why reports of the company's demise have proved unfounded all these many years. You can like the company's product line or not, but its reliable customer base will keep the company rolling along financially well into the foreseeable future

[AEGISBMD]

@zubbub

I always hated preaching. You feel same about Alcohol? Never saw anybody smoke a pack of cigarettes and then drive into a minivan killing 5 people.

I saw a study years ago that a smoker in Alaska has cleaner lungs than a non-smoking New Yorker.

[Wembley Fraggle]

But you do have to be heartless.

[Chain Smoker]

You don't have to be a smoker to own Altia. But, its a hell of a lot better if you are!!!

[charles weisinger]

Loving $MO, great weekly covered call play , except next week when it goes xdiv for .84 cents.

I would buy here and sell covered calls every single week. Its not my biggest hold. Its not $amzn , $googl , $aapl, but its a good $4000 investment right here. Covered calls plus dividend , wonderful investment.

[christinerogers]

Wish I knew more about covered call plays. Can you recommend any website for direction on how to learn the technique.
Thank you.

[tuexwt]

Easy to understand a covered call. The safest option play for the novice. You need to own a hundred shares of a stock to participate. 100 shares = 1 option. With the 100 shares you own you can sell one option on a price you agree to sell your stock at at the end of the options contract date. If the the agreed to price is exceeded by 1 cent the stock is sold automatically at the contract expiration date. Of course you may loose out on the stock run up beyond your agreed to sell price but you did collect the sell price on the option contract. Any leaning center at an on-line broker will provide you an overview of covered calls. Also, the covered call is the easiest option trade to get approved for by the broker.

[craftbrewinfo]

Nice article. Thank you. I prefer MO over PM because of the better payout ratio and debt structure. Chuck Carnevale did a nice article recently on debt structures of Corporations and MO and T's were well structured to that of their peers. . MO goes ex-dividend soon as well, so time to add more shares.

[40buick]

I’ll have to pass on MO. After watching my father-in-law die from emphysema after a lifetime of smoking, I can’t in good conscience make/take money from a supplier. There are too many other good companies to choose from to make up for this one.

[Regarded Solutions]

Like KO? PEP? JNJ? XOM?

[craftbrewinfo]

@Regarded Solutions ... yes, I struggled with the morality issues as well, but them came to the mindset that it is a business transaction and is a solid investment for my portfolio. Glad to have this stalwart in my portfolio. PEP on the radar as well! Just haven't got to that one yet... Long MO!

[zebsterd]

A lot of people struggle with this issue and it is your option but when you consider all the things out there that will take your loved ones' lives including seemingly innocent baby power to air pollution you have to put things into some perspective and realize that mother nature is just lurking out there waiting to prey on you. I've dealt with this issue many times in my 40yrs as an investment advisor.

[Falcon C46]

Buy 1000 shares MO in 2016 at 70 = $70,000
Dividends since 2016 = $13,415
2020 MO price 40 = a loss of $16,585 since 2016

If you really believe MO is a great investment I can get you some UBS mortgage reits for your portfolio, another great recommendation from seeking alpha.

[Regarded Solutions]

take a look over 50 years....get back to us with the numbers wise guy.

[Interesting Times]

@Regarded Solutions

Don't pick on the newbie ..LOL.. Getting $MO at $40 is a steal.. Thanks for the great article and i wish you well with your health..

[simplesolutions]

@Falcon C46
What you need to learn is how to buy stock. Paying $70 for MO was not exactly brilliant. RS is suggesting it might be worth a look at current levels, not $70. I paid $32 several years ago, sold half my position at $68 and am now enjoying a free ride with oodles of dividends collected over the years. You may want to consider value investing if you're going to stay in this game. Good luck.

[User 49135130]

You might not "Have To Be A Smoker To Own Altria", but you do have to be a moron to invest in a company that spreads death.

[Fangorn]

So you avoid Defence companies, Pharmaceuticals, Oil companies, and a vast variety of other companies with questionable products, or impacts on human life???

[Interesting Times]

@me_too

"but you do have to be a moron to invest in a company that spreads death." I would agree but i would add "unless it pays a 9% dividend" !!

Feel free to call me a moron. I have been called worse..

[Interesting Times]

@Fangorn

On my blog we talk about vaccines and how so much garbage is added to them that can literally kill you. Does anyone like metal or mercury in your system? I don't ! Many vaccines have it.

How about that BP spill from a few years ago. It ruined the Gulf but people invest in oil.. I could go on and on. You post was spot on ..

[rocknroy]

I've experimented with nicotine most of my adult life and my conclusion is, there is no future in it.

[Putt4doe]

This one I pass on, lost my wife and other loved ones to there product. Also ruined my life as well. Can’t support a company that causes so much pain and sorrow.

[Claudius Minimus]

Wondering why you even bothered to comment here then...

[Snappy Tom]

Regarded,

I also own 3 of your listed stocks...great minds think alike? Haha, nice article.

[Silli-Con Doc]

@snappy Tom
The more accurate quote is: “Great minds travel in the same channel.”
Alternatively, “All fools think alike.”

[User 10488261]

Snappy, please note the author has no position in MO. Not that it isn't a bad stock to own but he isn't "with you" on this one.

[Wapiti19]

And will there be a dividend freeze and / or divy cut ???