The Case for MO

Today I came across this Twitter thread by @soloprosperity explaining the pros and cons of dividend king Altria (MO). I thought it was a great summary so I’ve included it below:

Some quick notes.


1.Addictive Product: Pretty steady ~2% Rev Gr Last 10 Yrs
2.Extremely Profitable: ~28% CFROCE
3.Low Reinvestment Requirement: FCF = 96% of OCF Last 10 Yrs
4.Margin Expansion Last 10 Yrs: Gross 53% -> 61% & CF 33% -> 48% 5.Dividend Seems Fairly Safe: Dividend Coverage is at 84% Last 5 Yrs
6.Regulations: Essentially no new competition. It is a wonderful business unless you have moral issues re: the product, but there are some ?s and reasonable reasons why multiples have compressed back to ~2011/2012 levels despite a very strong overall market during that ensuing period… 


1.Organic Growth: # of smokers continues to decline.
2.Accrual Build-Up: Net Income > Cash Flow for a decade. 
3. Capital Allocation: JUUL & Buybacks. Largest buyback year in the last decade was the year the stock was trading at it’s most expensive. 
4. Future Shareholder Yield: Dividend is safe, but when you factor in buybacks, Total Shareholder Yield has outstripped Free-Cash Flow over the last 5 years (Taken on Debt). Indicates buybacks could slow moving forward. 
5. Valuation: Yes, today’s levels bring it back to the 2011/2012 levels on various metrics, but the firm has traded at much cheaper valuations in the past (99’ 02’ 08-10’ etc.) and so lower is always a possibility. 

Again, wonderful business, but there are some legitimate questions about the company and the accrual build-up, JUUL acquisitions & capital allocation in general (Poorly timed buy-backs), cyclical topic re: # of smokers in the U.S. and so the price today is valid IMO. 

I do own the stock despite the concerns because the core business is so easy. At a cyclically-adjusted FCF Yield of around 8.7% today, plus 1-2% in growth, that alone gives me comfort in earning ~10% over the next 5 years. A possible re-rate could add to that. 

Lastly, I think there is a low-potential right-tail event in terms of marijuana federal legalization. Not something I am betting on happening with certainty, but I think Altria’s distribution network is a potential valuable asset if that happens.


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