Summary
- 12 times earnings, 8% yield.
- The risk that's already built in to the price of Big MO.
- How much potential profit there might be.
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Altria (NYSE:MO): 12 Times Earnings, 8% Yield
No disputing this first statement, unless someone wants to be picayunish and note that as of the last trade it may have been 12.21 times earnings and 8,22% yield or some other slight variation based upon the share price. The point is that these are compelling fundamental reasons to buy a company’s shares if we believe the dividend is secure and the company’s future is bright. So let’s dive right in to find the answer to those two questions.
How Much Risk Is Already Built-In To The Price Of Big MO?
A great deal, I believe. Let’s look first at the regulatory environment for tobacco. Governments, at all levels, have a dirty little secret. While they use a pittance of the money they collect as a result of the Great Tobacco Settlement (via taxes) the truth is: No local or state government wants to see the end of tobacco sales, the taxes they collect are now part of their future revenue plans.
The reason why MO, Philip Morris International (NYSE:PM) and British American Tobacco (BTI) are all maintaining their profit margins in the face of a two-faced campaign against their product is that they are steadily raising the price of their product to compensate for the decline in total American adult smokers. Every time they raise their prices, ka-ching, ka-ching, up go the sales tax revenues for that city, county or state.
That brings us to the risk of e-cigarettes
We absolutely need to protect our citizens if this is a flawed product. But is the product flawed or are some, it seems mostly younger, people misusing it? Remember, e-cigarettes were originally conceived as a way to place less nicotine and other unsavory chemicals in smokers’ lungs. They were supposed to be a healthier way to enjoy a smoke without as many harmful side effects.
If this is so, and the research was appropriately conducted, what went wrong? Why have some people gotten sick and some have even died as a result of vaping (enjoying e-cigs)? One possibility now being explored is some people simply tried to save money by purchasing off-brand / black market e-liquids that have not been tested for safety. Some, hopefully fewer, might simply have been candidates for an intimate relationship with this year’s Darwin Awards.
Is vaping dangerous? If the medical community, the FDA and the CDC don’t know. I certainly don’t have the knowledge to contribute. I do notice that “it seems” the problem is not with vaping. Vaping was originally intended to deliver less carcinogenic material into the lungs. As near as I can tell, most problems that have come to light thus far have occurred because some idiot said, “Cool, Dude. Let’s just throw some heavy-duty THC into the mix and see what happens,” and the response was, “Yo, Gluehead, how about some sweet Everclear and Molly, man?”
The evidence is not in and this could yet be a risk factor for Altria. Does a decline from a trailing-twelve-month high of $66 to its current $40 adequately project some possible future write-down for MO? As an equity buyer, you don’t really find cause for panic if e-cigarettes are proven to be harmful. You care that the stock price already has discounted a worst-case scenario and the share price would be relatively unaffected after the first day or two of bad news.
Besides, it's a silly question to ask if vaping is harmful. Of course it's harmful! But millions of former smokers have actually stopped smoking in favor of vaping because the initial studies showed that vaping, while still not on anyone’s recommended list of miracle foods for health, was healthier than smoking.
