The stock market has been crushed since late February and the bond market along with it. Investors are scrambling to find yield, and Altria Group Inc. (NYSE: MO) may just have the dividend yield they are looking for.
The Dow Jones industrial average, S&P 500 and Nasdaq have all dropped around 20% since February 24, when the markets started to sell off. However, Altria stock has only dropped less than 15% in that time, due largely to its defensive nature and dividend.
However, the reason for this most recent market downturn, COVID-19, presents some interesting problems for people who use tobacco products habitually. Because the novel coronavirus affects the respiratory system, smokers are some of the most at risk. Tobacco use can be detrimental to the immune system overall.
Historically speaking, cigarettes have been considered recession-proof due to their inelastic nature. This recession may prove to be somewhat different, given the risks at hand. Or, it may prove the rule.
Bad Choices
Altria invested $12.8 billion for a 35% stake in Juul in 2018. Juul is known for producing vaping products, an alternative to smoking. However, there have been big problems with this investment.
Juul has seen increased scrutiny as more and more people begin to realize that e-cigarettes may be just as bad as the real thing. Even worse, this company has faced accusations that it has marketed tobacco products to underage kids.
According to the Centers for Disease Control and Prevention (CDC), electronic cigarette use has eclipsed conventional cigarette use among high schoolers. Some 11.7% of those students are using e-cigs, compared with 7.6% using regular cigarettes.
This culminated when the U.S. Food and Drug Administration (FDA) raided Juul’s headquarters in San Francisco. The FDA seized documents that it believed would identify the real health risks associated with vaping, as well as “sales and marketing practices.”
The FDA said in a statement, “The purpose of these inspections was to determine the compliance with all applicable FDA laws and regulatory requirements.”
As a result, Altria had to take a $4.5 billion write-down for its investment in Juul.
Juul isn’t the only investment that has underperformed for Altria. Cronos Group Inc. (NASDAQ: CRON) is another company that Altria has pursued. In this case, Altria invested $1.8 billion in Cronos stock for a stake of about 45% in 2018. Note that Cronos currently has a market capitalization of $2.1 billion.
Balancing Act
Despite these investments not paying off, Altria is actually in decent shape. The balance sheet at the end of 2019 showed $2.12 billion in cash and cash equivalents, no short-term debt and $23.58 billion in long-term investments (including the Juul impairments). Long-term debt totaled $27.04 billion and cash flow from operations totaled $7.84 billion.
24/7 Wall St.For the 2019 fiscal year, Altria paid $6.07 billion in dividends and repurchased $845 million in common stock. Retained earnings still amounted to $36.54 billion, even after the situation with Juul. The dividend yields about 9.2%.
The firm’s intangible assets continue to grow, reaching $12.69 billion last year, up from $12.28 billion in 2018. Its goodwill is down to $5.18 billion from $5.2 billion in the same time.
Revenues have steadily grown over the past few years, as have gross profits. At the end of 2019, total revenues came in at $19.80 billion, with $12.71 billion in gross profit. That compares with $19.63 billion in revenue and $12.25 billion in gross profits in 2018.
Coronavirus Concerns
Due to the pandemic, Altria has decided to suspend operations at its Richmond manufacturing center. This comes after a second employee tested positive for COVID-19. The company says that it expects the halt in operations there to last for the next two weeks as it continues to monitor the situation.
Altria’s board chair and CEO, Howard Willard, disclosed earlier this month that he had tested positive for the coronavirus. As a result, Willard will take medical leave after contracting COVID-19. Chief Financial Officer William Gifford is assuming these administrative roles in the meantime.
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