You may have heard of socially-responsible investing.
This investment framework tends to avoid businesses that are involved in tobacco, alcohol, sugary sodas, gambling, fossil fuel production, or even defense. There’s nothing wrong with having views about these topics – in fact, that’s what being an individual is all about. However, things get kind of silly when such views dictate how one makes money in the secondary market, or how asset managers invest in portfolios. You see – when you buy or sell stock, the company that you are investing in doesn’t get that money. You are merely trading with someone else. The company only receives your money when you invest in the primary market (IPO) or through new shares, a secondary offering. Socially responsible investing doesn’t do much at all to further such views. Most of what it does is self-limiting by inhibiting the wealth-creation potential of individuals with variant perspectives – those that may not like smoking, drinking, or gambling. Why shoot yourself in the foot?
Altria (MO) has been one of the best performing stocks in the history of the markets, and if you decided a long time ago that you didn’t want to “own” tobacco companies, you would have not only missed out on this top performer but you would have also missed out on owning one of the strongest dividends of any corporate on the market today. We were reminded of how powerful Altria’s business model truly is when it reported first-quarter results April 28. Adjusted diluted earnings per share advanced more than 14%, to $0.72 in the quarter, better than the consensus estimate, and the tobacco giant reaffirmed its full-year adjusted diluted earnings per share guidance in the range of $3.00-$3.05 for the year, offering growth of 7%-9% from an adjusted diluted earnings per share basis of $2.80 per share in 2015. Management continues to target paying out roughly 80% of adjusted diluted earnings per share as dividends each year. What a company.
Cigarette smoking is back on the rise – or at least smoking Marlboro is. Shipment volumes of Marlboro in the first quarter nudged up 1%, to 25,361 million sticks in the period, as total cigarettes sold by Altria, including other premium and discount cigarettes, advanced 1.2%. From a business standpoint, it’s good to see volumes back on the upswing, but the “secret sauce” of Altria’s business model is the pricing power it puts on display. The company’s net revenues increased 4.5% during the first quarter of the year reflecting higher net revenues across the board, and the progress against its $300 million productivity initiatives announced January 28 continues to benefit the operating line. Smokeable segment margins advanced 1.7 percentage points on an adjusted basis in the quarter, while they leapt 2.4 percentage points in its smokeless segment. Copenhagen and Skoal helped to drive the firm’s smokeless division, as expected. Total reported operating income advanced 6%, to $1.98 billion in the period. It was a great quarter.
But that’s not all that we like about Altria. The company may be one of the strongest dividend payers by itself, but the company has an extremely valuable stake in the recently-combined entity Anheuser-Busch InBev (BUD) and SABMiller (SBMRY). When the deal between the two beverage giants is completed, Altria will have a 10.5% equity interest in the consolidated entity and receive ~$2.5 billion in pre-tax cash. Not only will the cash received benefit its dividend profile, but the very idea that it has such a large stake in one of the biggest brewers in the world means that it has considerable financial flexibility to monetize such holdings to ensure ongoing dividend payments and growth in them for the foreseeable future. Altria currently registers a 1.1 as its Dividend Cushion ratio, and the company resides in both the Best Ideas Newsletter portfolio and Dividend Growth Newsletter portfolio.