As I mentioned over the weekend, I bought two different stocks last month. My first purchase was drug company Abbvie (ABBV). In the previous post I outlined how Abbvie was a riskier company, but had numerous strengths and a strong dividend yield. My 2nd stock was none other than Altria (MO). Altria Group Inc. is the parent company of Philip Morris USA, John Middleton, and Philip Morris Capital Corp. The company sells traditional cigarettes, smokeless products, and has a 10.2% stake in Anheuser-Busch. The company was formed when it spun off from Philip Morris in 2008. In this spin off Altria would focus on the U.S. markets while Philip Morris International would market to everyone else.
As traditional cigarette volumes have been in decline, Altria took measures to mitigate these losses. The company recently purchased a 35% stake in vaping company Juul and a 45% stake in Cronos (marijuana). They also spent $372 million for an 80% stake in Burger Sohne; a manufacturer of snus-like product. Altria is also in talks with Philip Morris International to once again merge together. Doing so would create cost synergies and allow Altria to market PM’s heated tobacco device, iQOS. Both companies are committed to a cigarette free future and understand the need to continue innovating. Revenue and earnings have increased steadily over time, due in large part to price increases.
At the time of this writing, Altria has a P/E of 10 and a dividend yield of 8.11%. The company hit a fresh 52-week low today as it faces increased government scrutiny, potential lawsuits, meager sales growth, and $29 billion in debt. In many cases, investments in lateral industries tend to work. However, if there’s a lack of sales growth, the debt can destroy a company. A perfect example is General Electric; a once great company nearly dissolving due to failed acquisitions and monstrous debt. In addition, the government is in the process of potentially banning flavored vaping products. This would absolutely destroy Juul and nullify any gains Altria was making in reduced risk products.
If we simply look at the numbers, the company looks better. Net margins have risen from 20.6% in 2016 to nearly 30% today. Earnings ticked up since Altria’s spin off in 2008. The dividend was recently increased by 5% and the payout ratio stands at a manageable 79%. And as mentioned above, the company is taking necessary steps to move away from combustible cigarettes. Even better, companies like Altria are recession proof! Overall, I like the low valuation, high dividend, and diverse product line. But like Abbvie, I understand the risks and took a very small stake of only 0.7%. Altria is a very interesting company, so I plan on discussing it further. In my next post we will dig deeper into Juul, its growth prospects, and how this government ban will affect the company.
DISCLAIMER: I am long on MO. I am not a licensed investment adviser or tax professional. I am not liable for any losses incurred by any parties. This blog should be viewed for entertainment and/or educational purposes only. Any transactions published are not recommendations to buy or sell any securities. Please consult with an investment professional before making investment decisions.