Only the Government Can Stop Cigarette Makers

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Tobacco is addictive. 

That’s why inflation doesn’t halt cigarette sales. 

The only thing that can stop cigarette makers is government policy. 

Tobacco companies have outperformed the overall market this year, and many of them offer incredible dividends. 

It’s no surprise that financial pros have been investigating these defensive stocks. 

Altria Group (MO) has been financial pros’ top tobacco company search over the last month. 

Many investors have ethical issues with the company.

So we leave it up to you whether a stock like Altria is right for you.

Nonetheless, for those who are thinking about picking up the stock, consider the following…

Altria Group’s Business

Altria Group is in the cigarettes, cigars, and smokeless tobacco business. It also has interests in the alcohol and cannabis industry, with a 10% stake in Anheuser-Busch InBev and a strategic investment in cannabis company Cronos Group. 

Altria’s portfolio brands include Marlboro, Black & Mild, Skoal, Copenhagen, and on!.  

The company sells products in over 300,000 retailers across 50 states. 

Most of its sales come from smokable products, including its Marlboro and Virginia Slims brands.

In 2018, Altria took a 35% stake in vaping company Juul for $12.8 billion.

After multiple writedowns, the company recently valued that investment at a mere $450 million.

Additionally, the FDA recently announced plans to ban cartridge-based e-cigarettes.

While sales of vaping products have risen, the FDA continues to work hard to limit their availability and impact.

Financials

Altria has had rather flat revenue growth over the last eight years, but not for lack of trying. 

In 2013, it made $24 billion in revenues. In 2021, it did $26 billion. However, 2022 has been hard. The firm has made $20.7 billion over the last 12 months. 

Youth smoking dropped to an all-time low of 2.3% in 2021. 

But one thing helping MO is its pricing power. The Marlboro brand is a leader in its category. 

With the company facing so much regulatory scrutiny, though, it has created a campaign called Moving Beyond Smoking to transition adult smokers to a noncombustible alternative by 2030.

The company has boosted its dividend over the years. It’s currently a whopping $3.76 per share, or a yield of 8.28%. 

It has $2.5 billion total cash and $27.6 billion total debt.

And its current ratio of 0.49x isn’t pretty. 

Valuation

MO trades at a bloated 46x P/E GAAP ratio.

However, its forward P/E GAAP ratio is 10.8x, which is more in line with its competitors. 

For example, British American Tobacco (BTI) is at 13x, and Philip Morris International (PM) is at 15.4x. In contrast, Vector Group (VGR) and Universal Corporation (UVV) have yet to be profitable. 

Additionally, MO trades at a price-to-sales ratio of 3.9x, notably better than PM at 4.2x but not as strong as BTI at 2.6x, VGR at 1.7x, and UVV at 0.5x. 

Profitability

If you’ve ever been to a gas station and peeked at the price of cigarettes, you’ll understand how the companies that sell them are making a killing. 

MO has a gross profit margin of 67%, slightly better than PM at 65% and notably higher than VGR at 52% and UVV at 20%, but not as high as BTI at 82.4%.

MO’s 8.4% net income margin isn’t that impressive. BTI’s is 20.5%, PM’s is 27.5%, and VGR’s is 19.7%. But MO’s has a lot to do with the writedowns we noted earlier.

That’s largely why MO beats its competitors with an EBITDA margin of 59.4%. BTI’s is 45.1%, PM’s is 39.4%, VGR’s is 40%, and UVV’s is 10.4%.  

Growth

MO’s year-over-year revenue growth has fallen 7.4%, while its competitors have been able to grow revenues in this tough market environment. 

However, Altria’s YoY EBITDA growth is positive at 0.96%, notably higher than that of BTI, PM, VGR, or UVV. 

Our Opinion 4/10

With a dividend yield of 8.28%, MO might seem like a good place to park your money during market uncertainty. 

The company’s stock is down only 4% this year, outperforming the S&P 500. 

But the firm’s top revenue maker is getting phased out over the next few years. Plus, the company carries $25 billion in debt, which used to be $12 billion back in 2018.

That extra debt bought a stake in Juul that failed badly.

With more than $39 billion in long-term liabilities, $8.3 billion in short-term liabilities, and only about $2.5 billion in cash, the company’s $8 billion in annual cash flow from operations won’t cut it.

What will get cut is Altria’s dividend.

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