What am I talking about? Altria insists on maintaining its unsoiled reputation in swelling dividends despite the obvious risk. If you go back 10 years in time, you will realize that Altria’s dividends have been on a stable increase (save for the wake of the dreaded 2008 financial crisis and the time surrounding the spin-offs that greatly affected Altria’s outlook in 2007-2009). Although this maintains an ear to ear smile on shareholders, it may have ravaging effects on Altria’s financial front. Nonetheless, Altria has managed to somehow find a way around the dividend implications. This aversion is of course the balancing on the edge that I am talking about.
Altria knows that it is setting up camp next to a roaring flame. Its 5% yield strains its income and leaves very little to reinvest. Similarly, its ever-increasing payouts stamp out the aspect of security. Altria in reality doesn’t have a fallback position. Similarly, the swelling payout ratios suggest that Altria is not in a position to increase its dividends in the near future. This means that Altria faces the grim possibility of falling off a cliff that it itself helped create. After all, the tobacco behemoth cannot maintain a perfect balance forever. All the same, I am confident that it has a way out.
First of all, you should note that Altria has the capacity to pull through economic hardships. Like many other alcohol and tobacco stocks, it has the tendency to perform better in trying economic times. If you were to ask an economist it would boil down to something called elasticity. Tobacco and alcohol products are predominantly inelastic. Demand therefore has little or no responsiveness to changes in prices or economic stability. This means that regardless of what analysts say about the economy, Altria will still perform.
Still on the economy, I also believe that Altria is in a somewhat safer position than some of its tobacco competitors. This is chiefly because its mainstream market is secured in the U.S. This means that it is less susceptible to the ripples caused by movements in the world economy. Therefore it can easily streamline its activities and pull out from unprofitable ventures without worrying too much about the implications of its actions on its global outlook. This is a very positive aspect, particularly so after considering that it is the biggest player in the U.S tobacco frontier. It enjoys unmatched economies of scale and incredible market shares.
I also believe that Altria’s move to become the first tobacco player to increase its prices acts in its favor. Before Lorillard (LO) follows suit, it will have collected swelling proportions of revenue. As earlier stated, tobacco prices are pretty much inelastic and I am positive that its price increases will have little or no effect on demand. Reynolds (RAI) is the only competitor that has followed suit as far as price increases are concerned.
In conclusion, I would say that the overall picture is caught up between two contrasting worlds. For starters, there is the issue on dividends. Even the most receded investor knows that high dividends negatively impact growth. At such a time, Altria needs to place emphasis on growth. This is because growth improves cash flow. The importance of positive cash flow cannot be overstated in the tobacco industry. Activists and environmentalists are always making court visits. This means that a tobacco player needs to constantly have a ready team of high profile lawyers to tackle litigation matters. My opinion: Altria’s outlook is not too bright at the moment. However, the future spells hope as the tobacco heavyweight has exhibited the ability to forge through trying moments. My verdict: It is a sell.