It was only a few years ago that Altria (NYSE:MO) stock was being feted as one of the best-performing stocks. With the Altria stock price down over 40% from 2017 peaks, today’s story seems very different.
Indeed, as InvestorPlace’s Will Ashworth noted on this site in 2016, $10,000 invested in Altria’s predecessor in 1968 would have been worth a stunning $66 million. And at the time Ashworth wrote, there was little reason to see positive returns reversing. Altria had pressure on its business from lower smoking rates, but it was still printing cash — and returning that cash to shareholders.
Yet MO stock has been in a steady, if not entirely consistent, downtrend for over two years now. The big issue of late has been the company’s stake in Juul, for which it paid $12.8 billion late last year. Increasing reports of lung diseases tied to “vaping” have led to negative press. And investors believe state-level regulation could significantly impact Juul’s business.
But those risks seem potentially overblown, particularly in the context of an attractive valuation. Increased regulation usually benefits incumbent leaders, as Altria’s own history shows. And the Altria stock price seems to incorporate something close to a worst-case scenario to begin with. It may take some fortitude, but MO stock looks like a buy here.
MO Stock and the Vaping Issue
More than a few analysts have noted the irony of Altria stock selling off in response to political pressure. As an excellent article on Seeking Alpha noted, MO stock has been here before.
In the late 1990s, stock of what was then Philip Morris fell over 60%. The catalyst was the enormous settlement with state attorneys general, which would cost over $200 billion. By early 2000, MO stock was at $5.
Of course, that price proved to be an enormous buying opportunity. By 2016, including dividends, MO had returned over 12,000%. The reason was relatively simple: Regulation was a positive for Philip Morris (Altria), not a negative. The end of advertising cemented the market share of a leading brand like Marlboro. Higher minimum prices did little to accelerate smoking declines.
The broad argument for Juul is if vaping fears lead to increased regulation, the same basic outcome will hold. E-cigarettes are a massively fragmented business. But Juul has clearly dominant market share, well ahead of even a brand like blu from Imperial Brands (OTCMKTS:IMBBY). Higher regulations — or higher taxes — will push out smaller, sub-scale operators. They will leave Juul at the top of the market with vastly lower advertising spending needed to maintain that competitive position.
Should Vapes Be Regulated?
Of course, that all presumes regulation will arrive at the federal level. That’s not guaranteed to be the case — and likely shouldn’t be the case.
After all, e-cigarettes clearly have moved some adult smokers from more dangerous combustible versions. And the cases of lung disease reported so far seem to come from vaping THC, not nicotine. More specifically, they appear to be a result of vaping oils used in “black market” THC-based products.
Common sense might suggest that established companies shouldn’t be regulated based on the illnesses. After all, the existence of, say, Jack Daniel’s manufacturer Brown-Forman (NYSE:BF.A, NYSE:BF.B) prevents the risk of deleterious effects from moonshine. The same should be true for nicotine vaping. Incidentally, this also should be true for a company like Cronos (NASDAQ:CRON), in which Altria has invested and which has developed a research and development center for safe THC vaping.
Of course, given the traditional behavior of politicians and regulators, common sense well may not apply. But it does seem unlikely that e-cigarettes will be outright banned. There’s a potential “Goldilocks” scenario here. Regulators do just enough to thin the market, but not enough to significantly depress demand.
The Case for Altria Stock
After the selloff, Altria stock now trades at a historically low multiple of barely 10 times 2019 consensus earnings per share estimates. Its dividend yield touched an all-time high in recent weeks, clearing 8% before retreating to a current 7.9%.
Both multiples suggest that the core business is flat-lining — and that the investment in Juul has been essentially lit on fire. Neither seems to be the case. Operating income still is growing. And Juul shouldn’t be written off just yet.
It’s not at all difficult to imagine more normalized trading moving MO to a mid-teen earnings multiple and a still-high 5% dividend yield. Both suggest Altria stock could trade back to the mid-$60 range, about 50% higher than current levels.
All that said, it’s too simplistic to believe that vaping alone has driven the selloff. Again, Altria stock was falling long before the Juul investment. High debt and an aggressive dividend policy have raised fears of a cut. That combination has wreaked havoc on stocks like Kraft Heinz (NASDAQ:KHC) and Anheuser-Busch (NYSE:BUD).
But some of the selling pressure that began in 2017 was caused by vaping, based on fears that U.S. customers would start defecting from combustible cigarettes at a higher rate. If Juul indeed will see plunging sales, it stands to reason that Altria’s owned business will benefit as well. As a result, the recent selloff seems somewhat illogical — and likely to reverse as clarity returns to Altria and Juul.
As of this writing, Vince Martin has no positions in any securities mentioned.