Altria (NYSE: MO): 12 Times Earnings, 8% Yield

No disputing this first statement, unless someone wants to be picayunish and note that as of the last trade it may have been 12.21 times earnings and 8,22% yield or some other slight variation based upon the share price. The point is that these are compelling fundamental reasons to buy a company’s shares if we believe the dividend is secure and the company’s future is bright. So let’s dive right in to find the answer to those two questions.

How Much Risk Is Already Built-In To The Price Of Big MO?

A great deal, I believe. Let’s look first at the regulatory environment for tobacco. Governments, at all levels, have a dirty little secret. While they use a pittance of the money they collect as a result of the Great Tobacco Settlement (via taxes) the truth is: No local or state government wants to see the end of tobacco sales, the taxes they collect are now part of their future revenue plans.

The reason why MO, Philip Morris International (NYSE: PM) and British American Tobacco (BTI) are all maintaining their profit margins in the face of a two-faced campaign against their product is that they are steadily raising the price of their product to compensate for the decline in total American adult smokers. Every time they raise their prices, ka-ching, ka-ching, up go the sales tax revenues for that city, county or state.

That brings us to the risk of e-cigarettes

We absolutely need to protect our citizens if this is a flawed product. But is the product flawed or are some, it seems mostly younger, people misusing it? Remember, e-cigarettes were originally conceived as a way to place less nicotine and other unsavory chemicals in smokers’ lungs. They were supposed to be a healthier way to enjoy a smoke without as many harmful side effects.

If this is so, and the research was appropriately conducted, what went wrong? Why have some people got sick and some have even died as a result of vaping (enjoying e-cigs)? One possibility now being explored is some people simply tried to save money by purchasing off-brand / black market e-liquids that have not been tested for safety. Some, hopefully, fewer, might simply have been candidates for an intimate relationship with this year’s Darwin Awards.

Is vaping dangerous? If the medical community, the FDA and the CDC don’t know. I certainly don’t have the knowledge to contribute. I do notice that “it seems” the problem is not with vaping. Vaping was originally intended to deliver less carcinogenic material into the lungs. As near as I can tell, most problems that have come to light thus far have occurred because some idiot said, “Cool, Dude. Let’s just throw some heavy-duty THC into the mix and see what happens,” and the response was, “Yo, Gluehead, how about some sweet Everclear and Molly, man?”

The evidence is not in and this could yet be a risk factor for Altria. Does a decline from a trailing-twelve-month high of $66 to its current $40 adequately project some possible future write-down for MO? As an equity buyer, you don’t really find cause for panic if e-cigarettes are proven to be harmful. You care that the stock price already has discounted a worst-case scenario and the share price would be relatively unaffected after the first day or two of bad news.

Besides, it's a silly question to ask if vaping is harmful. Of course, it's harmful! But millions of former smokers have actually stopped smoking in favor of vaping because the initial studies showed that vaping, while still not on anyone’s recommended list of miracle foods for health, was healthier than smoking.

(Click on image to enlarge)

Source: Marketwatch

While the above chart was posted as part of an article on a single-issue vote that might affect the 2020 presidential race, the numbers are telling. I do not imagine all 873,000 e-cig users in Florida were all non-smokers! Given Florida’s demographics, I would imagine most are smokers trying to quit or at least trying to find a somewhat healthier way to indulge. Wouldn’t it be interesting if the candidates speaking most loudly against “Big Tobacco” changed their campaign promises if they believe too many vapers would vote against them for that reason alone?

Anyway, is this a case of seeking the guilty and punishing the innocent? Let’s go full circle to “government” and toss out a bone for conspiracy theorists: The Tobacco Master Settlement entered into by almost every state attorney general (46) is now providing less and less income. A lot of these states sold “tobacco bonds” so they could spend for today’s needs and be retired when the piper came for his pay?

That time has now passed and many of these bonds have declined to junk status - some have even gone into default. Since e-cig revenues are cutting into the tobacco companies’ cigarette sales, wouldn’t this be a great time to smear e-cigs so they might be taxed using the same logic they used to win their quarter-trillion dollar Master Settlement, the fact that the states must now pay more for Medicaid for vapers as well as smokers?

How Much Potential Profit Might There Be For The Brave Souls Who Buy Now?

The answer to this question resides in whether or not you believe people will stop smoking, vaping, toking or whatever else they do that the saintly consider risky behavior. Here's my personal take. Your mileage may vary.

I believe tobacco should be treated like any other product, smoking like any other activity.

Many people believe that ”government should protect us from risky products or activities.” If you believe that, then I assume you also believe the government should regulate hard alcohol, beer, wine, eggs (depending upon the latest pronouncement or retraction,) sugar, sodas, SCUBA diving, skiing, base-jumping, skydiving, snowmobiling and bullying in schoolyards.

I don’t smoke. I wouldn’t want anyone I care about to take up the habit. I don’t let anyone who smokes do so in my home, but they are welcome to do so outside on one of my decks. I applaud that government buildings were among the first to ban indoor smoking and that industry has done much the same.

What I refuse to do, however, is tell anyone else how to live their lives. If that means they become a burden on the rest of us from a health standpoint, then continue making them pay via the products they buy, just as we do now. Make the companies that produce the product pay a “healthcare” surcharge. But the government must remember: That surcharge can never be so onerous that people stop engaging in the habit that feeds the flow to government coffers.

My Reason #1 to believe this is a fine time to buy into an industry that has almost always been maligned, has paid hundreds of billions for what they do, has passed along at least part of the bill to those who use its products, and has been granted what is basically a cartel, effectively in business with the United States and state governments. No one not already in the business can afford to go into the business. Cozy.

My Reason #2 is that I believe the US government will join almost every state that has made medical marijuana available and those who have gone further and decriminalized recreational use. This has nothing to do with my personal position on the subject. I personally will continue to prefer a fine aged single malt. But I look at the train of history as it passes before me and I believe marijuana will be decriminalized.

So what marijuana stocks would I buy right now? Not one of them. I'm instead buying MO, and not because of their investment in Cronos. I think that's just a small first step in the consolidation of what will likely be an industry as big as tobacco. You want to talk about millions or tens of millions of new consumers? I can’t be the only one who finds great humor in the same people saying they would never smoke nasty old nicotine – and then tokes up some grade-A dope into their lungs.

Why do I believe these new consumers will be buying, once it's legal to do so, from MO and its competitors? Your traditional backwoods or Lost Coast grower doesn’t have the quality control, the incredible distribution systems, or the logistic capability to go much beyond their immediate geographic area. For all those thinking they will now grow their own hydroponically or at least indoors, I would submit it will be cheaper to buy at the local 7-11.

It's quite expensive to grow marijuana indoors. Lots of water, lots of electricity for light. Outdoors, not a problem. Much cheaper to grow outdoors. Locate the fields in areas with ample sunshine and regular rain – like, say, the areas tobacco farmers thrive in today. And Big MO already has a magnificent network of hundreds of growers they have “cultivated” over the years by sharing the latest industry best practices, providing information to university agricultural extension complexes, giving merit-based scholarships to them and their family members.

The least expensive outdoor growers with proven skills in proven areas, incredible supply chain management, already-extant shelf space, and marketing muscle. It's a great combination. The only thing is, you have to be patient. Go ahead, pay me 8% to be patient.

Oh, PS to MO management: Ditch the name “Altria.” What the heck is an Altria? Yes, I know your predecessors were hornswoggled by a fast-talking PR firm that told you it meant “high something-or-other” in Latin. Get over it. The name is wimpy, obfuscates what you do (I’m sure one of the original motivations) and sounds like nothing.

If you won’t go with MO, then at least try something that says, “We are not ashamed to produce a product millions of people want, whether cigs or e-cigs. If we don’t produce it someone else will.” Here’s my suggestion: American Tobacco and Marijuana. Symbol? ATM, of course. Like the cash machine.