Sep

21

Altria (MO) - HOLD (Really holding on to my 800 shares)

September 21, 2007 |

(A reader asked for my opinion on Altria (MO).)

If you read my blog, you know I have Altria. Boatloads of them (at least compared to my portfolio size). I have 800 of these beauties. Altria has been called a cash cow before, and I still think it is - excellent dividend at above 4% right now and with a tendency to increase. Although most people think of the Marlboro Man when you mention Altria, they also have Miller beer and holdings in vice companies all around the world. Vice does pay: as long as you learn how to do it legally. Vice is one thing that produces consistent profits regardless of how bad the economy is: unemployed people keep drinking and smoking. Employed people drink and smoke to celebrate. Highly successful people drink and smoke to celebrate a lot more: but with more expensive poisons.

One thing I loved about it is that it divested their Kraft (KFT) operations. On March, they gave 0.7 shares of KFT for every share of Altria that investors had. I loved the divestidure, because now I have two good companies in my portfolio: one with high litigation risk (Altria) and one that just coasts along, gives me dividends, and waits a year until I can take its gains with the lower capital gains tax rate (Kraft). It also creates an interesting effect:

Quarter KFT MO Total
Sept 06 0.46 1.41 1.41
Dec 06 0.51 1.22 1.22
Mar 07 0.41 1.05 1.05
Jun 07 0.47 (*.70 = .33 ) 1.13 1.46
Sept 07 (est) 0.41 (* .70 = .29 ) 1.13 1.42
Dec 07 (est) 0.46 (* .70 = .32 ) 0.97 1.29

As you can see on the table, the revenue for Altria has decreased. The revenue of Kraft has remained stable. The total revenue of the 0.7 Kraft shares given to Altria owners plus the Altria shares shows a slight improvement, but very slightly: just enough to keep the interest. Most stock researches and most stock screens would miss this situation: a situation where value was generated by splitting a company, and even when the company does less than it did, now you have a second company to produce money for you.

Altria will separate their USA and their Worldwide operations in two different companies. In the USA they are prone to litigation (their major risk). However, they may be able to poison people in other parts of the world where people that are less litigious and hold the companies less accountable (or should I say: hold the people accountable for their own actions rather than the companies that meet their desires). If you travel through development countries, the Marlboro brand is a luxury and a status symbol. I think that as the economy improves in developing countries they will continue to use USA luxury brands (just as people in developing countries love buying Levis 501 jeans at $100USD, or timberland work boots at $150USD).

I think this separation will create significant value. It will allow the three companies (KFT, Altria USA, and Altria Worldwide) to concentrate on what they do best on each market, and to do it in the optimal way. It will also reduce the only major risk they have: litigation. I think total earnings will increase, and risk will be greatly decreased. It would become closer to putting money on the bank: except they will bring more dividends than banks offer interests.

Now, when we do the traditional analysis, I do not see a nice table here. Part of it is because some of the Altria value was divested into Kraft. But some of it does worries. I like high yield companies, but I also like to see some growth: preferably a bit better than 7%. Even banks (like Wachovia Bank (WB)) can do things like 8 to 9% growth and still hold a 5% dividend. That is the only reason I say HOLD. Hold to your shares if you have them, but don’t necessarily increase your position. There may be better stocks around.

Indicator Value My Take
PEG 2.21 Bad? Or KFT split?
Industry/Sector PEG 2.29/2.14 Neutral, until they split
EPS Estimates trend Down This Quarter, Up Current/Next Yr Neutral
Dividend Yield 4.40% Good
Yearly Growth Estimate Next 5 Years 7.25% Neutral
Long Term Debt 14.5B, decreased from 18B Good
Current Liabilities vs Current Assets 25.5B / 26.1B (They can pay debts) Good to Neutral
Insider Activity (last 6 mo) 17.2% of shares sold Bad
Institutional Change (to last Qtr) 2.2% Good

As I have mentioned you, I love Altria. I have been with it for a long time. Some other articles I have written on Altria:


Comments

2 Comments so far

  1. js on October 19, 2007 12:56 pm

    At what point should we load up on BAC and WB?

  2. js on October 19, 2007 7:33 pm

    Hey, whats up with WM washington mutual….that 6.8% yield is looking attractive and its share prices have been pummeled lately?

    What do you think…would love to se your analysis on that one too…

Name (required)

Email (required)

Website

Speak your mind

 

Recomended Links:

* Your Link Here