- 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.
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:
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).
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.
This article was written by
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.
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.