It is a very uncertain time for investors right now. It's clear the world is currently experiencing a severe economic decline. Still, it's not entirely clear if the global economy will bounce back, stumble around in the dark for years, or recover slowly. Predicting the outcome for companies is even more uncertain, especially given heightened valuations.
In this market, it makes sense to seek out safe stocks, and one of the safest stocks there is, in my view, is tobacco group Altria (MO, Financial).
The best-performing stock
Altria used to hold the record for the best-performing stock of all-time. Between 1968 and the beginning of 2017, the stock generated average annual returns of more than 20%.
However, over the past few years, the stock has started to languish. Several poor capital allocation decisions by management caused investors to reconsider their view of the company.
For example, Altria invested $12.8 billion in Juul in December 2018, acquiring a 35% stake, as it looked to expand beyond traditional cigarettes. It has since written down the value of this investment by nearly $9 billion. The firm has also put nearly $2 billion into Canadian cannabis company Cronos Group.
Since the beginning of 2017, Altria has lost nearly half of its value. However, the company could be an interesting portfolio addition in the current market.
According to analysts at Citigroup (C, Financial), U.S. consumers have been smoking more in lockdown. Meanwhile, cigarette prices have held up relatively well. This, the analysts believe, will translate into sales growth of 8% to 9% in the quarter. That's a big jump for such a cash generative business.
Indeed, Altria generated $7.8 billion in cash from operations in 2019. This was more than enough to cover the group's massive dividend outlay, which came in a $6.1 billion for the year. Altria pays investors a $3.36 annual dividend for every share they own. At a stock price of $46, this comes out to a yield of over 8%.
Risk factors
In the current uncertain environment, this sort of stable, cash-generative business might make an excellent portfolio addition. However, before jumping into the stock, there are several other factors investors should consider.
For example, there are the ethical considerations of owning a tobacco stock. Altria is the largest cigarette company in the U.S. This means the company is exposed to all kinds of risks and lawsuits. There's no denying the fact that the demand for its flagship product, cigarettes, is falling, and will only continue to decline.
At the same time, vaping, which was supposed to save the industry, hasn't become the white knight many tobacco CEOs were expecting. One of the primary reasons why Altria has been writing down the value of its stake in Juul is the mounting lawsuits against the business. At the end of 2019, the group noted an 80% increase in pending lawsuits against the start-up.
Juul's critics have been linking the start-up with the condition that's been named e-cigarette or vaping product use-associated lung injury, or EVALI, which was linked to vitamin E acetate.
Juul's products do not contain vitamin E acetate or THC, and many (mainly non-medical) sources claim that research on the link is insufficient to come to any conclusions. Nevertheless, customers have stopped vaping because of the association, and it has fuelled critics' attacks on the business.
Altria and its big tobacco peers are used to dealing with lawsuits, so the company should get through these issues. It all comes down to whether or not the investor is happy buying the stock with these issues in place. For some investors, the certainty and predictability of Altria's cash flows may make the risk worth taking.
Whatever the case, on cash flow alone, I think Altria appears to be one of the market's most attractive stocks in a highly uncertain environment.
Disclosure: The author owns no share mentioned.
Read more here:
- Warren Buffett's Advice on How to Find Good Business Managers
- How to Build a Portfolio According to Charlie Munger
- The Sequoia Fund's Simple Four-Point Checklist
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