- I used to smoke and it was easy to quit! I did it 1,000 times! Maybe it would have been only once if they had E-Cigs back then.
- Altria has been a core holding for me and I am considering upping my position.
- Dividend champions are in an exclusive club and MO has been a stalwart through both good and bad times.
I have been on vacation for about 6 weeks running all over Europe. If I still smoked, I would have never made it through Paris alive. While this article will lean towards my "Peter Lynch" approach more than just bare fundamentals, I will include a few tidbits to support my thesis.
During my travels through nearly 12 countries, I watched people smoking just about anywhere and everywhere. If folks were not smoking regular cigarettes, they we "vaping" E-Cigs. While it may have nauseated many of the folks nearby, I found myself thinking how lucky I am NOT to be a smoker, but owning shares of the biggest and the best company, in my opinion anyway.
MO Is Still King Of The Hill
Altria (NYSE:MO) is a company that has both infuriated many and made many quite wealthy. The company sells tobacco and that is its "cross to bear." I myself have owned it before it bought Kraft (NASDAQ:KRFT) (and spun it off), before it spun off Philip Morris (NYSE:PM), during all of the highest-profile lawsuits, and at share prices so low it would make your head spin. At the same time, its dividend yield was off the charts and still is, for me, and I continue to be shocked and amazed.
For my bank account, it means MO is the king of the hill!
The E-Cigs Have Given A Breath Of "Fresh Air" To The Industry
I am not going sit here and extol the virtues of the E-Cig craze, because I simply do not have the facts. Yes, there are the experts who SEEM to have all the answers as to the less or more harmful affects of E-Cigs versus regular smokes, but in reading a few recent reports, I am of the opinion that nobody knows anything yet, and that might just mean another opportunity for MO to not simply survive, but to thrive.
In this article, the first sentence is bullish about regular smoking, hence a plus for MO.
The World Health Organization reported that three years ago the number of smokers worldwide increased to almost one billion.
While the non-smokers, myself included, might be alarmed, I can assure you that in the boardroom of MO and other big tobacco companies, smugness still reigns supreme: More smokers, more revenues, more profits.
On the other hand, the battle keeps gathering steam as everyone debates the concerns of the rapid rise in the E-Cigarette business. Note this commentary:
Among them, the electronic cigarette has become increasingly popular as it allows smokers to enjoy the gesture without the negative effects of tobacco-cigarettes.
The number of people who started using the e-cigarette went up by almost 20 percent since last year (from 2.1 million in 2014 to 2.6 million users this year) in Great Britain.
That is ONLY Great Britain folks! Take a look at this chart from the pros at Wells Fargo:
A ninefold increase in worldwide sales by 2017 is yet another strong positive for MO and its counterparts. Yet the issues are still being muddled and more than confusing than ever. To wit:
However, experts have started to worry that this number is on the decrease, due to the fact that erroneous studies have tried to prove that the electronic cigarette has negative effects on human health.
Almost a quarter of the people surveyed (22 percent) believed the e-cigarette is not healthy, compared to last year's 15 percent.....A study conducted in the U.S. showed that the various flavors that certain types of electronic cigarettes have, contain dangerous chemicals that can harm both the lungs and the immune system.
President of Action on Smoking and Health, Deborah Arnott expresses her worry regarding the fact that such misconceptions could lead to a lower number of people who quit smoking.
"The growth of this false perception risks discouraging many smokers from using electronic cigarettes to quit and keep them smoking instead which would be bad for their health and the health of those around them," Arnott says.
On the one hand, E-Cigs are bad for you, on the other, E-Cigs might help you quit real cigarettes, and in the middle, the confusion has left lots of folks in limbo and still smoking regular cigarettes almost out of frustration that nobody knows what they are taking about.
Here is yet another article that seems to support my thesis:
Debate continues to rage with regard to whether and to what extent electronic cigarettes should be pushed as 'healthier' alternatives to conventional tobacco. As vast swathes of the population move away from tobacco to take up vaping, health authorities seem to be split right down the middle in terms of whether e-cigarettes are being given an unfounded bad name or are being irresponsibly pushed as harmless... The rapid increase in false perception poses a big threat to smokers. It has discouraged a considerable number of smokers who were planning to begin e-cigarette. Therefore, they keep on smoking conventional cigarette which is more hazardous.
There lies the "fresh air" for MO; confusion! The company sells more E-Cigs, they win; the company sells less E-Cigs but more regular cigarettes, they win. Actually, all the company needs to do is let this debate rage on for the next quarter of a century or longer until the next breakthrough product is developed, and that lovely dividend paid and raised by MO will keep on rolling in!
So How Large Is The E-Cig Market And How Well Will MO Do?
Trefis wrote this article roughly 8 months ago, and they have a projected growth table that I believe to be conservative actually:
(click to enlarge)
While the overall market is estimated to be about $10 billion by 2017 (see WFC chart above), according to Trefis, MO's share will rise from 4% this year to 8.5% by 2017, and an anticipated share of 15.7% by 2021. That is an impressive increase in market share in just 6 years.
Revenues could jump from today's $160 million to nearly $2.5 billion by that time, so as far as I can tell, the growth in the sector should be rapid and rich, and it will be a good thing because Wells Fargo estimates a drop in traditional cigarette revenue from about $14.8 billion to $7.4 billion by 2023:
Wells Fargo & Co. (NYSE: WFC) has projected that Altria's revenue from traditional cigarettes will drop in half from $14.8 billion this year to just $7.4 billion in 2023.
That would mean the E-Cig business for MO will comprise nearly 33% of Altria's revenue by then, versus the 4% it comprises today.
In addition, as reported here:
BIS Research has forecast that the e-cig market will grow to $39.6billion by 2024. That translates to a compound annual sales growth rate (OTCPK:CAGR) of 27.3% - impressive for any industry.
If those numbers are accurate, a share of roughly 20% (my own estimated number based on the Trefis chart) could be nearly $8 billion, which will overtake the drop in regular cigarette sales. Also, keep in mind that Altria is not a one-trick pony when it comes to tobacco products of all kinds, so it is my opinion that the focus will be on reducing costs and increasing margins of E-Cigs, as the revenues increase.
Who knows, with the clout of MO it can buy up plenty of the smaller E-Cig players to add even more revenue and profits simply by immediately accretive acquisitions, while at the same time continuing to increase its revenues and earnings on its current products in this sector.
To me that becomes renewed growth. The share price could reflect that as well as the dividends.
The Dividends Are More Than Lovely
MO is a dividend champion that has paid its dividend for 45 consecutive years, but by spinning off Kraft in 2007 (when MO "fell" off the aristocrat charts), any chart you look at shows a drop in its dividend. But that does not account for the dividend from the spin-off company, which MO shareholders received anyway.
Today the yield is a lofty 4.10% and somewhere down the road, the dividend will likely be increased once again and perhaps by about the same 8% as last year. If it does, that would mean an annual income of about 2.25 per share, from today's $2.08 per share.
If you own 1,000 shares of MO, you could see your annual income, just by owning shares, jump to $2,250. I am of the belief that there are ZERO public companies handing out 8% raises to all their employees.
While the payout ratio is 82%, MO is a cash cow, and is embedded in so many retirement portfolios, that the ratio could jump to 95% and I would not be concerned about the dividend safety.
Yes, revenues jumped by about 7% as of the last earnings report, and earnings dipped by about 13% as it converts more sales to the lowered margins of E-Cigs, but the company still generated $18 billion last quarter and can easily pay its debt, and give us, the shareholders, nice bumps in our "income" from dividends.
The forward yield of 16.92 is less that the S&P average, and as the company re-tools and grows margins (just my opinion, of course), the future once again looks bright for us non-smoking MO shareholders. Currently the margins are at around 27%, which is higher than one year ago and is closing the gap to its usual 45% range.
60% of outstanding shares are institutionally held, its market cap is at about $100 billion, and its enterprise value is at $111 billion.
Room to grow? Well, all I can say is that I just may add on any dips to my own retirement portfolio, just for old time's sake, and for anyone looking at this dividend mega-monster stock, why not consider it for your long-term portfolio?
Oh, and quit smoking. It's not good for you!
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