Last week I exited my position in SCANA (SCG), which you can read more about in my Recent Sell – SCG post.
Since then, I have been on the lookout for a replacement for my dividend Portfolio. Initiating a new position, and/or adding to existing Portfolio positions, were both on the table.
As it turns out, I’ve initiated a position in one of the stocks I mentioned at the tail end of that last post, Altria Group (MO).
Altria Group is engaged in the manufacture and sale of cigarettes, cigars, pipe tobacco, smokeless tobacco products, and even wine.
This is my first foray into directly owning a tobacco company, and while I don’t use any tobacco products, I don’t have any real reservations about making an investment in the industry.
It’s no secret that smoking has been linked to many health-related issues (lung cancer and emphysema to name a couple), and that the smoking rate continues to drop as time passes. So why invest?
Well, MO appears to be a stable company, with good management, decent earnings growth, and a healthy and growing dividend. MO should also stand to benefit from the recent corporate tax cuts, seeing a reduction in tax rates from 35% to 21%. There may even be a chance for some sales growth, although I’m certainly not investing in MO for its sales growth, as the industry is in decline, and there are always regulatory headwinds.
However, tobacco companies are aware of these trends and are taking steps to pivot their businesses. As smoking has declined, there has been an increase in vaping and other smoking alternatives. Former Altria spinoff Philip Morris (PM) launched iQOS a few years ago, which is a device designed to heat tobacco, as opposed to burning it, offering a less damaging way to consume the nicotine. iQOS has shown some potential to be a growth driver internationally, but is not available in the U.S .yet. It is expected iQOS will be available in the U.S eventually, and it needs to be licensed to MO before that can happen.
Another possible growth driver could be the legalization of cannabis at the federal level. An established company like MO would have the packaging and distribution capabilities to take advantage of such a change in the law. While it seems the trend is eventual legalization, this isn’t something that will become reality anytime soon.
The past year has seen MO stock under pressure, with the price dropping from $75 to $57. I attribute this decline to renewed growth concerns and perhaps some rotation out of higher-yielding stocks as rising interest rates have made fixed-income investments more desirable.
Let’s take a look at my purchase details…
MO
On Tuesday, 6/12/18, I purchased 50 shares at $57.979/sh, for a total of $2,898.95. This consumed most of the proceeds from my sale of SCG last week.
MO shares were yielding ~4.85% at my purchase price. This is well above my Portfolio average of a little over 2.6%.
This purchase results in an additional $140.00 in annual forward dividend income, or $35 per quarterly payment. This is only about 65% of what I lost with the SCG sale. I’m hoping to use some of the remaining SCG proceeds and add a few shares to some of my existing Portfolio holdings, and fill some of the dividend income gap.
MO has a fairly short streak of dividend raises, at 9 years. The dividend was reduced in both 2007 and 2008. It’s not clear to me if this was a result of company-specific issues during the financial crisis, or primarily a result of the PM spinoff.
MO has raised its dividend twice in the past year, most recently declaring a 6% dividend raise in early March. The dividend growth for MO has been solid, in the 8% range for the 1-year, 3-year, and 5-year time periods. The payout ratio for MO is around 70%.
MO is the 41st stock in my Portfolio, essentially replacing SCG. It starts with an initial weighting of ~0.9%, which puts it at the bottom of my holdings, wrestling that spot away from Texas Instruments (TXN).
I was able to make this MO purchase a couple of days before the stock went ex-dividend, so I’ll receive my first MO dividend payment in July – not a long wait at all!
Any thoughts on my MO purchase? Do you own MO or PM in your portfolios? If so, how have they been as an investment for you? As always, I look forward to your comments!
Hi ED –
Thanks for the summary. I have not directly considered MO, but it looks like a good choice for you based on the criteria you covered. I don’t smoke or use any tobacco products either, but I don’t think that would dissuade me from looking into MO or a related company (whether tobacco, alcohol, etc.).
Thanks for the post. – Mike
Hi Mike, always good to hear from you. Your thoughts on investment into ‘vice’ stocks appear to align with mine.
I’m hoping that there is gain to be had with some P/E expansion with MO. While I hopefully wait for that gain to occur, getting close to 5% yield on my investment is nice.
After the whole SCG saga for most of the past year, I wanted to remove myself from the utility sector for a while, and MO fits the bill.
We’ll see how the MO investment works out. If it doesn’t, it shouldn’t cause too much pain, as it starts as my smallest Portfolio position.
I understand you swapping SCG for MO. Congrats on capturing the dividend with your timing of the buy. Seems like both MO and PM are good presenting us good values and yields these days. Still think there is a lot left in the tank for these tobacco plays. Thanks for sharing.
It’s good to hear you think the tobacco companies have some fuel left in the tank, DivHut. I see you own PM, but not MO. Did you acquire PM after their spinoff?
MO seems to have pulled back along with many of the consumer staples since the start of the year. The current price to initiate a MO position seemed reasonable to me.
Being able to purchase early enough to pick up the July dividend was a nice little bonus.
Thank you for dropping by and sharing your thoughts.
Yup… PM was added after the spin off. In hindsight, MO should have been in my portfolio from the beginning but at the time all tobacco was under some sort of litigation in the U.S. and it didn’t look good for them. Now, I’m wiser and have learned to not pay too much attention to the financial headlines 🙂 Geez, the financial headlines told me to sell GWW because AMZN was killing everything in its path. Less than a year later GWW is at an all time high. Same for JNJ, MCD and many other names.
Hi ED. MO is my largest holding and has been for many years. PM was my second largest holding until the recent sell off. I might add to PM. I have been happy with both of their recent dividend increases. However, I do struggle with the declining prospects of the industry as an investor. Tom
Hey Tom. Wow, tobacco is a monster for you with MO as your largest holding, and PM not far behind.
MO seems to keep growing their earnings despite essentially flat sales. I’m hoping that trend of increased earnings can continue, but it would be nice if they could get the sales trending upward, too.
As for dividend increases, MO has been very consistent with approximately 8% increases for the last several years. It’s hard not to like that.
I think adding MO is a great move. It’s still a good business with nice growth prospects. They can step in the cannabis products for example which have also just been approved in Canada. In my view, this company will eventually thrive again as people will remain prone to addictions. I currently have MO and PM in my portfolio. Adding more stocks add these prices seems a sound strategy. Good luck with this one! 💪
Hey DC! Good to hear you like MO’s prospects as well. The price seemed to offer a good entry point, so I took the plunge.
I’ll be keeping an eye on MO looking for some revenue growth. That should only help with the work management is doing in growing earnings.