Summary
- I think the "cigarette sales are on the decline" story is very, very old and has limited relevance to investors in companies like this today.
- Comparing the company's financial obligations to its current and likely resources reveals that the dividend is safe here.
- For those who are nervous about buying at current, discounted, prices the options market provides a great alternative.
Since writing my bullish piece on Altria Group Inc. (MO) back in the Summer of 2018, the shares are down about 33.5% against a gain of about 16% for the S&P 500. My total return is “only” down about 20%, though, due to the positive impact of the dividends. Much has happened at the firm, obviously, so I thought I’d check in on the name to see if I should add to my position or cut my losses. I’ll try to answer that question by looking specifically at the latest financial history here. In particular, I want to try to understand the extent to which the dividend is sustainable at the current rate. I’ll also look at the stock as a thing distinct from the underlying business. Finally, as is my frequent practice, I’ll offer an options trade.
I know you’re busy people, dear readers, and so I’ll offer a synopsis of this article now in case you missed both the title and the bullet points above. I think Altria is a great buy at the moment on the back of a sustainable dividend. For those who are nervous about buying at current levels, the options market is offering some decent premia on short puts. For my part, I’ll be both buying shares and selling the puts I describe below, and I recommend that investors follow me.
Before getting into the meat of the article, though, I want to spend some time framing the discussion by making two fairly obvious points.
Pssst….Water is Wet
First, I’ve been an investor in Altria off and on over the years and conversations about the stock reveal that people often don't think deeply about particular investments. I was invested in Altria back when I was working on Bay Street (Canada’s Wall Street), and this was beneficial in some ways because it exposed me to great investment minds from around the world. Literally every time my tobacco investments came up in conversation, I would be treated to some variant of the following. Sometimes the person would lower their voice as though they were revealing some forgotten ancient wisdom. “Cigarette sales are on the decline.” I would then stare at them impassively for what was probably an uncomfortably long pause and finally say “Yes. That is true. Cigarette sales are on the decline.” If I were in a particularly spicy mood, I might compound the awkwardness with “and oh, yeah...water’s wet.” The multi decade decline of cigarette consumption in rich countries has been obvious for decades, per the following:
Second, I need to point out that I’m not an American, though I sometimes wish I were. This status as a non-American makes me quite sensitive to analysis that we might politely call “U.S. Centric.” For instance, if we unpack the chart above, we see that the declines in cigarette consumption have been most noteworthy in both Japan and the United States. We mustn’t forget about those Europeans, though. For example, per day consumption of cigarettes declined in the Land of the Free and the Home of the Brave at a CAGR of about 2.9% between 1975-2010. Over the same time period, though, the decline in France and Spain was only about .98%, and in Germany consumption declined at a CAGR of only about 1.6%.
