With the COVID-19 pandemic turning everyone’s routines inside out and demonstrators taking to the streets day after day to protest racism and police violence, the stress levels in the United States are surging. If there was ever a time a person might want to light up a cigarette, this is it.
Does that mean this might also be the time to invest in tobacco stocks?
It seems that the answer is maybe not, if you look at the price trends for Altria Group Inc. (NYSE: MO). Shares dropped to $30.54 on March 23, when the stock market plunged because of the COVID-19 pandemic. Like many stocks, the price has come back but has not regained its levels from earlier this year.
After trading close to $50 a share throughout January, Altria is now in the low 40s, closing at $42.72 on Friday. Instead of spiking upward since March, the stock has risen somewhat then stayed fairly stable.
This has drawn the attention of Stifel analyst Christopher Growe, who points out that Altria, based in Richmond, Virginia, has largely missed out on the rally in consumer goods. Even so, he reiterated his Buy recommendation.
‘Controversy at Every Turn’
“The tobacco stocks, especially Altria, seem to find controversy at every turn,” Growe said Monday in a research note cited by Barron’s, “with investors increasingly focused on the negatives and the risks, which have always been ever-present for this industry, and not rewarding the improvement in the fundamentals.”
Growe says Wall Street may be overlooking some good signs for Altria. After serious health concerns were raised last year about vaping, the decline in tobacco smoking has slowed.
He also sees opportunities for raising the price of cigarettes.
“We remain confident in Altria’s ability to lead a price increase again this fall, in line with our estimate (+6% price per pack growth this year) supporting the 4% profit growth we estimate for Altria’s Smokeable division,” Growe said.
A Business Model Buffett Admired
Despite efforts to diversify — for example its investment in Juul e-cigarettes — Altria’s main cash flow is connected to smokeable tobacco, like top brand Marlboro cigarettes.
In the 1980s, Warren Buffett of Berkshire Hathaway (NYSE: BRK.A) described what he saw as the beauty of tobacco companies this way: “It costs a penny to make. Sell it for a dollar. It’s addictive. And there’s fantastic brand loyalty.”
If only it were still that easy. Health hazards related to tobacco have motivated a significant number of smokers to give up the habit. The number of places where a person is allowed to smoke has been drastically cut because of concerns about second-hand smoke. E-cigarettes and recreational marijuana are competing with tobacco, although they have issues that have hampered their growth.
That Important Dividend
As the number of tobacco smokers declines and the stock price has dipped, Altria and Philip Morris (NYSE: PM) have maintained their dividends. After its annual meeting of shareholders in May, the Altria board of directors declared a quarterly dividend of $0.84 a share to shareholders of record June 15. Altria’s yield is more than 8%.
The company has invested in both Juul Labs and Cronos (NASDAQ: CRON). Altria has a $12.8 billion stake in Juul but that investment has been problematic. The U.S. Federal Trade Commission (FTC) filed an administrative complaint in April alleging that Altria and Juul violated federal antitrust laws when they reached their deal.
The FTC complaint cites a long paragraph in the agreement between Altria and Juul that prohibits the cigarette maker from participating in any way in the e-cigarette market. The deal does allow Altria to engage in business related to its MarkTen brand “as such business is presently conducted.” The business had been shut down already.
By the time the FTC filed its complaint, the investment had soured. In the third and fourth quarters of 2019, Altria wrote down $8.6 billion of its stake in privately held Juul.
No action on the FTC complaint is expected immediately, perhaps not before next year. Altria has declared that it intends “vigorously” to defend its investment in Juul.
Last year Altria paid $1.8 billion for a 48% stake in cannabis company Cronos. Shortly after the deal closed, the price of Cronos shares plunged. But this year, Cronos stock has been relatively stable and did not drop as much in March as other stocks did.
At midday today, Altria was trading at $42.795, up slightly from its open of $42.23. Cronos was up about 13% at $7.615.
Growe admits that Altria has plenty of challenges ahead. But he sees opportunity here
$5 Million Donation
Altria announced on Friday that it would donate $5 million to address systemic racism and advance social and economic equality. The company said the $5 million was in addition to its annual corporate donations.
It will also conduct a month-long employee giving campaign which will match on a two-for-one basis all employee donations.
“These are difficult times, and we must find ways to embrace our differences, address underlying systemic issues and move forward as a country,” said Billy Gifford, Altria’s chief executive. “We know we don’t have all the answers, but we will learn by listening to our diverse colleagues, community members and others as we seek progress within our company and the places we call home.”
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