Any thoughts about Altria?

Ignoring the socially responsible aspect, anybody have any thoughts about Altria?

It took a big dump a week or so back when it leaked that the FTC (or what is FDA?) was going to take Juul off the market. And did, but MO has an injunction and suit claiming the govt didn’t do proper diligence on the ban.

Either way, the stock got hammered, so if it sticks the hammer is already down, and if not, well, it might get a pop? Meanwhile the dividend is super fat (almost 9%), well covered, and tempting.

I’d ask on the Altria board but the Fool has closed it. Thanks.


Ignoring the socially responsible aspect, anybody have any thoughts about Altria?

Cigarette consumption in the US is declining at the rate of about 4% a year. For MO to continue to grow earnings from the sale of cigarettes it has to raise the price progressively, and somewhat significantly, to compensate for diminishing sales. The company can do this, up to a point, as cigarettes are addictive.

MO has seen the writing on the wall. It’s focus on tobacco and nicotine products, other than cigarettes, is logical and timely. At what cost, though? Apparently, cost wasn’t much of an issue (perhaps, panic was?) when MO took a stake in Juul. This observation is supported by how much they paid, which was about 150 times EBITDA. For the price to be remotely reasonable Juul would have had to grow earnings like gangbusters far years ahead.

To my mind, MO sees itself somewhat backed into a corner and willing to over spend to get out. One problem with this is that dividends (and growing dividends) are very important to their shareholders. MO spends around three quarters of their free cash-flow on dividends, which is also, coincidentally, about three quarters of their net earnings. This constrains the company’s ability to spend on acquisitions and developing new products. So, more debt? In a rapidly rising interest rate environment taking on a significant amount of new debt would likely be a strong headwind.

At the current share price — about $42.00 — I see MO as somewhat undervalued given projected earning’s growth of about 5% per annum for the next couple of years. The dividend is probably safe short of something unforeseen, or management taking a big zag, though the potential for longterm capital appreciation might be somewhat limited. The way ahead is not terribly well defined (IMO). Plus, there’s regulatory uncertainty and the vilification of big tobacco, both of which might weigh on the share price.