When it rains, it pours. Just ask investors in Altria Group (NYSE:MO). The first quarter or so was all smooth sailing with the market seeking safety over growth. The second quarter has turned into nothing short of a blood bath with fears about inflation, consumer weakness, nicotine and analyst downgrades hammering the stock before today.
And if you thought that was the worst, then “Surprise!” With reports that the FDA is expected to order JUUL to be taken off the market, the stock has lost an additional 10% as of this writing. Yes, the same JUUL that the company had written down to a fraction of its cost. By a quick back of the napkin calculation, it appears like Altria has lost more than triple the value of JUUL in market cap. Talk about an overreaction.
As a result, Altria is down 28% from its 52 week of $57 as it’s trading at about $41 right now. By definition, Altria is super deep into a bear market of its own. As terrifying as that sounds, especially for investors with Altria as a large position like us, it’s downright scary to think about situations like “What if they go after the manufacturers with more taxes?” and “What happens if they regulate further?” and so on.
But with extreme pessimism comes opportunity. We believe this is a great opportunity to nail a monstrous but relatively safe yield. With the sell off and the upcoming dividend increase, buying at the current price will provide an astounding yield on cost of 9.36%. We’re not talking about a company that loses money. We’re talking about an industry leader that makes an addictive product at low cost and sells it in volume at a handy margin. And not to mention, has pricing power being an inelastic product in times of inflation. To put that yield into context, the Series I bonds that match inflation is currently yielding a tad about 9% with no capital growth (but safety of principal).
Altria’s best returns in the past were in the years following extreme pessimism. This is not hindsight bias alone but basic investing logic goes something like this: Investing at the heights of pessimism in a company that has staying power and has shareholders in its thoughts always increases your odds of coming out on the right side in the long run. The key is “long run.” No one knows what the next few weeks or months are going to bring. But over the next few years, locking in on this yield is likely to, well, yield results for income seeking investors. Not to forget, the ones who reinvest dividends accumulate more shares at depressed levels. So, if and when things stabilize, it has a magical effect on the overall returns.
There’s a funny saying that the stock market is the only place where people run out of the store when there is a sale. To understand the impact of such sales events, take a look at the tables below:
- Both tables calculate the yield on cost and annual dividends for every $1,000 invested in Altria.
- Both tables use a 5% annual dividend growth.
- The difference between the two is that the first table shows the impact of buying at $60 (6% yield, which is not bad) vs buying at $41.
- By a show of hands, let’s see how many income investors won’t take it? For that matter, even value investors.
We cannot predict the government’s next action. We cannot predict the Fed’s next action. We certainly cannot predict the war situation in Ukraine. But what we can predict with certainty is 9% compounded annually works out to a pretty satisfactory return over the long run.
Altria’s EPS may go down. Or they may increase. But what we can predict is that the company will still continue to pay out 80% of what it makes to shareholders. And history so far suggests that the payout increases each year. Heroes are not made in the war field when the enemy just folds under pressure. Heroes are made when salvaging and even winning from a disastrous situation. Running when the chips are down isn’t ideal. We are staying invested with Altria and even buying more on such opportunities. Good luck everyone.
Disclaimer: This article is strictly from an investment perspective. We check out our personal feelings, politics, and morals when it comes to investments. We humbly request readers to keep the discussions to the stock.