Tobacco giant Altria (NYSE: MO) has managed to attract investors to its title despite many challenges. After all, the double punch of consumers in search of a healthier lifestyle and fine-tuned tobacco control laws creates a tough business environment.
Still, the company continues to be very profitable, as its first quarter results show, with its share price generally rising since those numbers were released in late April. Let’s break down the last report and assess whether the business is still a worthwhile investment or an equally managed business that is mostly in ashes these days.
Altria wants you to smoke them if you have them
Since Altria sells nearly essential products to its customers, it has not suffered as much economic damage from the pandemic as other companies.
In the first quarter, the company reported net sales of $ 4.88 billion, down just 3% year-over-year. Net income attributable on an adjusted basis declined by nearly that percentage to $ 1.98 billion ($ 1.07 per share).
On average, analysts who tracked the tobacco stock modeled $ 4.98 billion on revenue and adjusted net income per share of $ 1.05. In other words, Altria marked a huge step forward and a slight profit beating for the quarter.
The company also reiterated its guidance for all of 2021. Management estimates that the company will record adjusted net earnings per share of $ 4.49 to $ 4.62, which would represent a year-over-year improvement. other from 3% to 6%. He did not provide an estimate of income.
What Altria has said is that it intends to maintain its dividend policy, in which its long-term payout ratio target is around 80% of adjusted net income. This certainly reassured investors who might not have been impressed by the mixed results for the quarter or the rather mixed earnings outlook.
Altria is, after all, a high dividend stock, and such a policy should keep its yield high. At present, the return is around 7%, which is very high for a large company on the stock market.
The fight against tobacco darkens Altria’s future
While I’m a fan of the profitable build-and-forget businesses that can generate growth every year, I believe Altria as a business (and therefore as an investment) has a bleak future.
The US government’s intermittent war on Big Tobacco is clearly not over, with the Biden administration declaring its goal to reduce nicotine levels in tobacco products and even to ban the sale of menthol cigarettes altogether (although the latter will affect some peer tobacco manufacturers much more than Altria).
And while Altria has made a reasonable breakthrough in alternative tobacco products, the company is running up against struggling e-cigarette maker Juul, in which it has a 35% stake. He has high hopes for Philip Morris International‘s (NYSE: PM) The IQOS tobacco heater, for which it has the exclusive rights to sell in the United States, but given that overall tobacco consumption in the United States continues to fall, I doubt that it comes close to traditional cigarette-making cigarettes. income.
And clearly anticipating the decriminalization of marijuana, Altria has also invested capital in the legitimate future of the drug with its meteoric spending of $ 1.8 billion on a 45% stake in the Canadian cannabis specialist. Cronos Group (NASDAQ: CRON) in 2019.
Cronos, however, is one of a multitude of marijuana companies facing a domestic market facing significant challenges. It frequently records heavy losses and lacks a clear path to steady profitability. Its share price has plunged since Altria’s investment. US decriminalization will open up our huge market to Cronos, of course. But Canadian and American competitors will also seize the opportunity.
Altria is burning
So for me there are more threats than opportunities for the Altria title. We owe management credit for surviving, if not thriving, the “low smoke” era. Yet even the most talented leaders can do little to keep a fire burning in the face of increasingly stiff headwinds.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.