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Altria: Careful Now

Jun. 02, 2023 11:22 AM ETAltria Group, Inc. (MO)BUD, BUDFF, PM169 Comments
Deep Value Ideas profile picture
Deep Value Ideas
6.56K Followers

Summary

  • In this article, I take a close look at how Altria Group, Inc. has accomplished the seemingly impossible - solid profit growth despite a continued decline in volumes.
  • I show why Altria's operational excellence is also an indication that the growth engine is slowly running out of steam.
  • Nevertheless, I also mention a few bright spots, especially with regard to the U.S. cigarette market.
  • I also provide my take on Altria's stake in Anheuser-Busch InBev, which has recently come under pressure given the fallout from the Bud Light controversy.
Train about to cross broken bridge

John M Lund Photography Inc/DigitalVision via Getty Images

Introduction

I have covered Altria Group, Inc. (NYSE:MO) stock several times in the past. In my last article, published in April, I discussed whether I still thought the stock was a good investment after its somewhat disappointing full-year 2022

This article was written by

Deep Value Ideas profile picture
6.56K Followers
Tired of effortful investing strategies with uncertain prospects? As a former deep value investor, I learned to appreciate the benefits of a dividend-focused value strategy several years ago. My strategy puts an emphasis on capital preservation and steadily growing income. I write primarily about stocks I hold in my diversified dividend stock portfolio, which emphasizes high-quality value stocks that offer meaningful growth and long-term safety. Feel free to reach out to me via direct messaging here, on Twitter, or through the comments section of one of my articles. Hit the “Follow” button if you'd like to join me on my journey to financial independence.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of MO, PM, BTAFF either through stock ownership, options, or other derivatives. 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.

The contents of this article and my comments are for informational purposes only and may not be considered investment and/or tax advice. I am neither a licensed investment advisor nor a licensed tax advisor. Furthermore, I am not an expert on taxes and related laws - neither in relation to the U.S. nor other geographies/jurisdictions. It is not my intention to give financial and/or tax advice and I am in no way qualified to do so. I cannot be held responsible and accept no liability whatsoever for any errors, omissions, or for consequences resulting from the enclosed information. The writing reflects my personal opinion at the time of writing. If you intend to invest in the stocks or other investment vehicles mentioned in this article – or in any form of investment vehicle generally – please consult your licensed investment advisor. If uncertain about tax-related implications, please consult your licensed tax advisor.

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 (169)

Deep Value Ideas profile picture
Thanks for reading my latest article, I hope you enjoyed it.

If you'd like to show your support, feel free to leave a "Like" and hit the "Follow" button. Also, don't forget to activate notifications in case you want to be alerted when I publish a new article.
S
@Deep Value Ideas advancing heated tobacco efforts will likely involve significantly higher capital expenditures than investors have been accustomed to in recent years.
WTF?
Japan Tobacco developed for Altria the heated tobacco device. Since Altria has as much as no costs. Very funny article altogether. You say Altria will not be able to increase the dividend much longer but do you think they will increase it now in August by about 5% or what? All very nebulously written unfortunately....
S
@Deep Value Ideas Also very funny that you prefer BTI. It is precisely the share that has only known one direction for about a year. The Altria share is doing extremely better. Sorry but for the article I can not give you a Like.
Deep Value Ideas profile picture
@StevieCool Thanks for the comment. Let me address your points.

I think that the difference in capex between Altria and PMI is pretty significant and it is easy to see the different progress both companies made in smoke-free over the last years. Granted, there's the collaboration with Japan Tobacco, but it's a long road before this HT device can be marketed, and I think it will require significant brand building efforts - same as NJOY and Altria's own HT device SWIC.

I do think Altria can continue hiking its dividend, but Mancuso's letter confirms that earnings growth will be lower going forward. One of the key messages of the article is that the company's headroom is getting smaller and that in particular growth through margin expansion will level off eventually. I am quite confident that we will see a ~5% increase this year, anything significantly less would contradict the CFO's letter.

Finally, I wouldn't gauge the quality of a company based on the near-term performance of its stock. True, $BTI currently performs miserably, but in my view this does not mean that it's the inferior company. It has its issues, and the recent CEO departure isn't helping sentiment either. However, I'd argue that many investors probably dislike $BTI due to it being U.K.-domiciled and hence exposing investors to exchange rate risk. Personally, I actually welcome currency diversifications.
T
Pssst: this is when you buy the stock (post dividend distribution/under $44).
Deep Value Ideas profile picture
@T-Trader99 Yes, the valuation is compelling - my position is already rather big, and part of my risk management strategy is to avoid concentration risks.

Comparing $BTI and $MO, I think the former offers the better return potential and has less question marks.
T
@Deep Value Ideas People pound the buy and hold-drip strategy with MO. Pointing out the high yield and compounding results over long periods of time. Some come right out and say it’s a long term hold for the yield and nothing else. I personally see it as a great trading vehicle with a safety net of sorts. The PPS will rise as the x-date approaches, it will dive post x-date as the distribution is subtracted like clockwork. Buy after-sell before x-date. The safety net is: if you get caught and it doesn’t work, you take the high dividend in cash and reload for the next cycle. I create my own “dividends” executing this strategy, and it pays much more than the quarterly yield.
Deep Value Ideas profile picture
@T-Trader99 That's a good point, I also have found $PM as a similarly good trading stock. And trading the stock is definitely a safety net compared to higher derivatives like knock-outs. Selling options might prove worthwhile, too.
U
Long MO and adding when I can.
f
@User 39720196 "Long MO and adding when I can."

So am I... holding 2,578 shares at this point. I'm a buyer below $42.
Deep Value Ideas profile picture
@User 39720196 Thanks for sharing, happy investing.
Very Thirsty For Dividends profile picture
@fun2roc

Great goals- I have a sizeable position also both in non-retirement and retirement accounts that I have been accumulating for about ten years. I consider even the current price-45.22 an historical bargain. It may take a little time for the price to test 42 again; I believe that for that to happen there would either have to be another senseless/irrational analyst's downgrade ( of the "melting ice cube" vintage) or an unfavorable announcement by the FDA. Otherwise, MO appears in tact for the most part in the short and intermediate term , at least from a dividend perspective.
S
On June 1, 2023, Altria completed its acquisition of NJOY Holdings, Inc. NJOY’s product portfolio is led by NJOY ACE, currently the only pod-based e-vapor product with market authorization from the FDA.

Our goal is to build on NJOY’s strengths and help the company reach its maximum potential by leveraging our vast sales and distribution network, our world-class marketing resources, and our relationships with millions of adult smokers interested in smoke-free alternatives.
p
this Bud light thing is a joke.......if you liked bud light because it made you feel like a real man, then you stopped buying it because they put a he/she on the label, than i don't want your biz anyway..just saying..i wonder what those cans will be worth in the future....
buckiowa profile picture
@paullyballz
Yeah if you want to lose 3 out if 10 customers, good strategy!! Marketing genius!
J
@paullyballz Why would you buy from a Political Company a beer product? Its not about beer for them anymore...
Profitcripper profile picture
Who got money from the latest lawsuit? Curios? I have 3000 shrs and didn’t get nothing?
Deep Value Ideas profile picture
@Profitcripper Can you elaborate further, or share a link to further information regarding this lawsuit?
O
@Profitcripper
who, what, where ,when, how, and as always, why?

thanks in advance

Fish
C
CRAZY LONG Altria is about to blow up. Get in or look in the rear view.
Deep Value Ideas profile picture
@CMoneyEverywhere Blow up in the sense of going up or down? :)
Very Thirsty For Dividends profile picture
@Deep Value Ideas

Could mean explode in the sense of expansion (big bang?)
Deep Value Ideas profile picture
@very_thirsty_for_income I agree, @CMoneyEverywhere probably meant that. However, I highly doubt that we will see meaningful expansion anytime soon.
Beto50759 profile picture
The employees of MO (and several others) wake up every day and go to work on my behalf. Then every 90 days they send me a pile of cash. That pile of cash keeps growing, and all I have to do is decide what is the highest and best use for it. Someone else works and I make money!!!
Dividend Growth Investing = BEST JOB EVER!!!
As for MO specifically; When I saw that the REALLY BIG MONEY, aka the bond market, is very willing to continue to buy long term debt issued by MO without any discounting due to being in a “dying industry”, then the oft repeated question regarding the long term viability of the company went away.
Long MO for the duration.

There is one thing I have learned - to exorcise the equity. In the stock market, assets are always fluctuating, and that doesn't shake me. Assets are only good for feeding the ego. But what feeds my cash flow are the dividends.

"I don't have the ambition of wanting to suddenly become rich."
Deep Value Ideas profile picture
@Beto50759 That's a great way to think about an investment in MO (and every dividend stock for that matter). And thanks for mentioning Altria's bonds here in the comments section - it's a good sign indeed. The 2059 notes are a good example (of course keeping in mind the revaluation due to the bond's pronounced duration and high coupon).
Very Thirsty For Dividends profile picture
@Deep Value Ideas

Just curious as to what the coupon interest is on those notes maturing in 2059. Thanks!
Deep Value Ideas profile picture
@very_thirsty_for_income Here's a good overview:

investor.altria.com/...

CUSIP 02209SBG7, coupon 6.200%, current YTM approximately 6.9%
S
While we're celebrating, why not look at a long-term price-chart of MO, showing MO over $75 in May of 2017. So if we;re jumping for joy, perhaps not jump too high
Deep Value Ideas profile picture
@Sugar Charlie I don't think that's a fair comparison. Altria stock was clearly overvalued in 2017. A P/E >20 makes no sense for a tobacco business.
S
@Deep Value Ideas Not a great performance to have a stock priced at what it was in 2014. No doubt aggravated by the serious missteps such as JUUL disaster. Still highly profitable as one of the pieces of the old Philip Morris; with cost basis about $1.61, so yield on cost almost 300%. Could not buy anything reliably more advantageous with proceeds of disposition net of tax.
Deep Value Ideas profile picture
@Sugar Charlie Of course, not a great performance over this period, but as you say, at least in part attributable to managerial missteps (Juul, heated tobacco strategy). Also, the regulatory environment has not exactly improved, and particularly the looming menthol ban is weighing on $MO and $BTI.
S
While we're celebrating, why not look at a long-term price chart of MO, which shows the stock over $75 in May of 2017,compared with $45 now. So when jumping for joy, perhaps let's not not jump too high.
caperdory profile picture
Fair assessment with MO and its future...smoking is on a slippery slope and MO is very slow to adjust...I think the risk owning is on the high side...I would feel a whole lot better if I felt MGT was capable
Deep Value Ideas profile picture
@caperdory Thanks for the comment. Indeed, MO is slow to adjust. But maybe now that they are feeling more and more pressure (most importantly with PMI entering the U.S.), they transform at an accelerated pace.
S
Investment in tobacco companies make little sense for some of the reasons you point out. As a group, the advantage of stocks over most debt is the opportunity for growth; with risk-free debt opportunities today offered at 5%+/year, why bother with big tobacco?
R
@Stephenbakerlaw because when the "risk free" government debt declines the music will stop and you'd better have a MO or REIT chair.
Deep Value Ideas profile picture
@Stephenbakerlaw Thanks for commenting. However, I am personally not a big fan of bonds, other than maybe a relatively short maturity ladder. It all boils down to the individual investor's goals, priorities, and risk tolerance. As a dividend investor with a long-term view, one of my objectives is to minimize reinvestment risk, i.e., the risk of having to reinvest the proceeds as a bond comes due in a low interest rate environment.
Very Thirsty For Dividends profile picture
@Deep Value Ideas

That happened in the 1990's- rates began to steadily decline, and the 15% you received on US government paper was reduced to below 6% .If you were to reinvest your matured longer term treasury notes/bonds, you got stuck unless you were invested in 30 year treasury bonds issued during the 1980's.
Another disadvantage is that the principal is fixed for each bond investment, whereas you can reinvest the dividends that stocks generate and increase the size and dividends of your stock positions. Note that with Altria, currently, the dividend payout will increase 14% per year, based on the (1+ yield) X (1+yearly rate of dividend increase) pattern for reinvested dividends . That's far more flexible /dependable than depending upon 15% on a 30 year bond, which if inflation remains under control, will not be revisited so easily.
R
Crocodiles, cockroaches, nuclear waste, Altria. Get used to it.
Deep Value Ideas profile picture
@RayRay1000 Haha - well said. :)
Vintage Dude profile picture
@RayRay1000 Crocodiles?
R
@Vintage Dude the answer is: things that will endure forever.
S
Also very funny that you prefer BTI. It is precisely the share that has only known one direction for about a year. The Altria share is doing extremely better. Sorry but for the article I can not give you a Like.
Deep Value Ideas profile picture
@StevieCool I replied to your comment above.
S
advancing heated tobacco efforts will likely involve significantly higher capital expenditures than investors have been accustomed to in recent years.

WTF?

Japan Tobacco developed for Altria the heated tobacco device. Since Altria has as much as no costs. Very funny article altogether. You say Altria will not be able to increase the dividend much longer but do you think they will increase it now in August by about 5% or what? All very nebulously written unfortunately....
Deep Value Ideas profile picture
@StevieCool I replied to your comment above.
Dicktater143 profile picture
Long Altria and BTI .
Deep Value Ideas profile picture
@Dicktater143 Thanks for sharing - which do you like better?
Dicktater143 profile picture
@Deep Value Ideas as of now I’ve been adding more BTI . It’s a screaming buy , I hold a large chunk of Altria , adding to BTI . Very happy with both long term . Maybe would buy PM if valuation was at right level .
Deep Value Ideas profile picture
@Dicktater143 I see it the same, and the company being U.K.-domiciled is likely one reason for the poor performance (of course, there's other issues as well). I appreciate the currency diversification from a dividend income perspective. It's a pity that $PM stock isn't cheaper, I am reluctant buying it at the current valuation.
j
Bud is a steal at these prices. Maybe MO should consider buying them out or merging. They need to diversify outside their circle.Nojoy is not the answer
Deep Value Ideas profile picture
@justanopion It's been a long time since I last looked at $BUD when I was contemplating an investment in this company (around 2019). I have to say it was a relatively quick decision (due to the lackluster balance sheet and management) and I ended up avoiding beer companies altogether. I hope Altria does not buy out or merge with Anheuser.
j
@Deep Value Ideas buy a consumer staples stock get back to your roots
Deep Value Ideas profile picture
@justanopion I know, but at the same time I'd appreciate the company focusing what it does best - being a highly profitable tobacco business. There's plenty of risk merging these businesses. Similarly, I am also quite happy that PMI and MO ultimately decided to remain separate entitites (there were talks of them merging in 2019).
D
Thx for a clear pro/con analysis. MO is one of my largest holdings, and only slightly positive due to buying at inopportune valuations. Sold PM at last $100+ run up and dripping BTI. That said, in this economic environment, I'll take the well covered dividends as the lesser of perils in that I've recently retired and will NOT sell equities at discounted prices...
I'm reminded of a quote by ??? stating that recessions are " when stocks return to their rightful owners" Need to be mindful of that statement as the media whipsaws fear and frenzy out of the markets.
Long MO, BTI
Deep Value Ideas profile picture
@Dennis 1 Thanks for the comment - glad you liked the presentation and found it balanced.

You wrote:
"I'll take the well covered dividends as the lesser of perils in that I've recently retired and will NOT sell equities at discounted prices..."

Well done, that's exactly the point,in my view.

I take so much comfort from a portfolio with an ever-increasing stream of dividends, knowing that I don't have to rely on selling principal during retirement.

Feel free to check out one of my earlier articles, in which I discuss this aspect of investing:

seekingalpha.com/...
R
Thanks for a nice pro/con article.
I purchase MO in the low $50’s and by dripping all the dividends I’m now teetering between being in the red (now) and in the green this month. As long as I’m close to even, I like the yield, but the future of Mo is shaky at best.
Dicktater143 profile picture
@Radcon3 let the drip work you’ll be glad you did .
Deep Value Ideas profile picture
@Radcon3 Thanks, glad you found the article balanced. Personally, I'm on the fence about reinvesting my $MO dividends. Due to the high yield, it's a significant amount of money that can make a meaningful impact also on other positions.

That said, @Dicktater143 has a point here - messing with compounding can be a pretty bad decision, and it is important to weigh the pros and cons. A large part of the past success of a PM/MO investment was due to reinvestment of dividends when the stock was trading at depressed valuations.
R
@Deep Value Ideas
Iv been fortunate to being able to drip all my LT dividend stocks. Nothing like compounding! I’m not about to sell MO, but no doubt about it, they have and had problems. It would be foolish for most investors to ignore.
d
I'm long MO since 2015 with over 9000 shares. I'm based in the US and had BTI and IMBBY for three years. I got fed up with the eroding pound to the dollar and constantly checking how the pound was holding out. Took those positions and reinvested them into MO which made my position quite large today. I take the dividend money and reinvest elsewhere to avoid having an even larger position.
Deep Value Ideas profile picture
@dlkid50 Thanks for the comment, great you bring up the currency issue. I can really understand that from a U.S. investor's perspective, an investment in $BTI or $IMBBY is not worthwhile due to currency issues. I am from the EU and maintain a globally-diversified portfolio with an emphasis on U.S.-domiciled companies. Hence, I actually welcome having some exposure to the United Kingdom from the perspective of FX. Of course, however, I wouldn't go all to heavy with my GBP exposure.
C
@dlkid50 wish I would have bought more MO instead of BTI. BTI stock price has been sinking like a rock. It’s painful to watch when no one can explain why.
Very Thirsty For Dividends profile picture
@Chris K Aloha

I think to some extent the reason for the decline is some rotation out of staples and back into technology. This to me is irrational when it happens but advantageous to investors who desire to add extra shares at lower prices if they are convinced that they are holding a solid company
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