There are controversial companies across nearly every sector and industry. Then there are tobacco companies, arguably the aristocracy of controversy generators among publicly traded stocks. It’s nearly 2020, but tobacco companies like Altria (NYSE:MO) are still viewed as purveyors of turbulent headlines.
Altria, the company behind Marlboro cigarettes and Copenhagen and Skoal smokeless tobacco, among other brands, is a consumer staples stock and one of the sector’s more volatile constituents. Remember, the stocks of companies that produce staples are prized for their above-average dividend yields and below-average volatility. With a yield of 6.38%, Altria stock certainly checks the first box. But MO stock does not check the second box as completely.
In April, Altria stock price was flirting with $58. Six months later, it slipped below $40. Meanwhile, the likes of Coca-Cola (NYSE:KO) and Pepsico (NASDAQ:PEP), which also make some unhealthy products, seemingly just keep grinding higher. But Altria stock price has surged about 27% off its October lows.
With tobacco equities, moves like that in short time frames can often be traced to reductions in the perceived headline risk of cigarettes. That’s the case for Altria stock now. MO stock is benefiting from an absence of negative vaping headlines recently and speculation that the scrutiny of the Food and Drug Administration is baked into the stock.
“We are getting more bullish on the tobacco sector than before, especially the businesses focused on cigarettes,” said Citigroup analyst Adam Spielman in a note out last week. “Conversely we think investors will become a little less concerned about (reduced risk products).”
Juul Is Not a Jewel
Altria is a “strategic investor” in vaping company Juul, a company that has arguably authored the most recent version of the tobacco controversy playbook. Like Altria and Phillip Morris (NYSE:PM), Juul has been accused of trying to sell its products to kids.
That, among other issues, prompted some states to ban vaping products. While some of those clouds are clearing (Massachusetts, for example, is lifting an emergency ban), Juul is still in regulators’ cross hairs and investors are taking note. Tiger Global, one of the vape company’s earliest investors, slashed its estimate of the valuation of Juul to $19 billion while Fidelity now values Juul at $16.4 billion.
“Juul’s valuation reached $38 billion a year ago when Altria Group Inc. acquired a 35% stake amid vaping’s surging popularity,” reports Bloomberg.
Unfortunately for the owners of Altria stock, Juul isn’t the only one of Altria’s investments that’s gone haywire. In March, Altria announced a $1.8 billion investment in Canadian cannabis firm Cronos (NASDAQ:CRON). Cronos traded around $24 in late March and is now worth less than $7.20 per share.
Then there is the groundswell of support for more virtuous investments, both among retail and professional investors. It’s safe to say that all those environmental, social and governance (ESG) exchange traded funds you’ve been hearing about exclude tobacco equities, such as Altria.
Many university endowment funds, such as the University of Pennsylvania, also exclude tobacco stocks.
“Tobacco is a known addictive product, whose use is the single leading preventable cause of death worldwide and which is responsible for well-documented and substantial social injury,” according to Penn. “Although tobacco is a legal substance, it is the only product which, when used appropriately and as directed, leads to premature morbidity.”
The Bottom Line on Altria Stock
In the current environment, it’s tough to convince investors to embrace tobacco stocks, but in defense of Altria, it’s hard to find equities that, like Altria stock, have dividend yields north of 6% and are trading at 11.2 times their forward earnings. Plus, as highlighted by the aforementioned Cronos investment and MO’s deal with Anheuser-Busch InBev, the cigarette company has more irons in the fire than just tobacco.
Additionally, Altria is a highly profitable company with a deep competitive moat.
“We believe Altria is very likely to continue generating excess returns on invested capital for the next 20 years,” said Morningstar in a recent note. “The sustainability of current levels of profitability and returns on capital depend on the positive impact of price/mix being at least in line with the annual volume decline,” it added.
Investors searching for income can’t be blamed for considering Altria. stock Likewise, investors who are looking to build virtuous portfolios can’t be blamed for avoiding MO stock.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.
