I'm Worried About MO

[Kerim]

I can’t believe I’m typing this about MO. It was the first individual stock I ever bought, it has been one of my largest holdings throughout my DG journey, and it has always happily resided in the “never sell” corner of my holdings. Until now.
 
The financials just aren’t looking so hot. Earnings have crumbled the last few years, as they’ve struggled through the incredibly costly juul debacle. The payout ratio is completely underwater, which is all kinds of troublesome. In the past, I didn’t worry much about the secular decline in their core business, but now I am starting to wonder if the pricing power they’ve used to offset it is less potent than it used to be. So even when the juul stuff is in the rearview mirror, what are earnings going to “rebound” to? It is hard to see it getting back to its earnings peak of $3.63 in 2017/2018, anytime soon at least. What exactly is going to drive an earnings rebound? (Sure, there is a little diversification there with BUD and CRON, but with MO it has always been, and still is, about the cigarettes.)
 
To my eyes, sentiment on SA is so strongly (overwhelmingly?) bullish (other than those decrying tobacco companies as evil) that it has to be a bearish indicator. The two arguments I see most often in the comments there are “people have been predicting MO’s doom for decades” and “once pot is legal nationally, MO is going to dominate a whole new industry with its scale and national distribution prowess.”
 
As to the first, the decades of doom-saying about MO have been despite the company’s healthy underlying fundamentals. This time, the foundation really looks like it is crumbling, and without a big rebound in earnings, lots of debt, or a dividend cut, MO has little cashflow with which to make repairs. I’m sure they don’t have a Google or Berkshire sized war chest.
 
As to the second, I sure hope MO can develop new income streams in marijuana. But to take it as a foregone conclusion, or to assume MO will be able to simply turn on huge new revenue streams as soon as national legislation were to pass, is counting your chickens before the eggs are even laid. I live in a state with a fast-developing legalized recreational marijuana industry, and I’m just not really sure how sound the thesis is anymore. And we may not even see national legislation in the first place! (In the meantime, I can even see legal marijuana cannibalizing some of MO’s business.)
 
Anyway, I’d love to hear better argument on the bull side for MO, if anyone has them. Or any other relevant thoughts, really.
 
I’m gonna go check out the premiums for selling some near- or in-the-money calls…

[EricL]

(12-20-2021, 03:53 PM)Kerim Wrote: I can’t believe I’m typing this about MO. It was the first individual stock I ever bought, it has been one of my largest holdings throughout my DG journey, and it has always happily resided in the “never sell” corner of my holdings. Until now.
 
The financials just aren’t looking so hot. Earnings have crumbled the last few years, as they’ve struggled through the incredibly costly juul debacle. The payout ratio is completely underwater, which is all kinds of troublesome. In the past, I didn’t worry much about the secular decline in their core business, but now I am starting to wonder if the pricing power they’ve used to offset it is less potent than it used to be. So even when the juul stuff is in the rearview mirror, what are earnings going to “rebound” to? It is hard to see it getting back to its earnings peak of $3.63 in 2017/2018, anytime soon at least. What exactly is going to drive an earnings rebound? (Sure, there is a little diversification there with BUD and CRON, but with MO it has always been, and still is, about the cigarettes.)
 
To my eyes, sentiment on SA is so strongly (overwhelmingly?) bullish (other than those decrying tobacco companies as evil) that it has to be a bearish indicator. The two arguments I see most often in the comments there are “people have been predicting MO’s doom for decades” and “once pot is legal nationally, MO is going to dominate a whole new industry with its scale and national distribution prowess.”
 
As to the first, the decades of doom-saying about MO have been despite the company’s healthy underlying fundamentals. This time, the foundation really looks like it is crumbling, and without a big rebound in earnings, lots of debt, or a dividend cut, MO has little cashflow with which to make repairs. I’m sure they don’t have a Google or Berkshire sized war chest.
 
As to the second, I sure hope MO can develop new income streams in marijuana. But to take it as a foregone conclusion, or to assume MO will be able to simply turn on huge new revenue streams as soon as national legislation were to pass, is counting your chickens before the eggs are even laid. I live in a state with a fast-developing legalized recreational marijuana industry, and I’m just not really sure how sound the thesis is anymore. And we may not even see national legislation in the first place! (In the meantime, I can even see legal marijuana cannibalizing some of MO’s business.)
 
Anyway, I’d love to hear better argument on the bull side for MO, if anyone has them. Or any other relevant thoughts, really.
 
I’m gonna go check out the premiums for selling some near- or in-the-money calls…

The earnings you are quoting are taking those horrible missteps into JUUL and other endeavors into account already. Adjusted earnings continue to rise, and the payout ratio based on those earnings remains right at the 80% payout ratio target.

Altria also owns 10% of AB-Inbev that it could monetize if needed.

The picture is far from rosy regarding growth, but I don't think it is nearly as dire as you suggest either.

I'm perfectly content holding for the 7.5% yield and 4-5% dividend growth to see how things shake out.

[Kerim]

Yeah, I get those arguments, thanks. But you can't pay dividends out of 'adjusted' earnings. If my math isn't awful, they're paying out more than $6 billion a year in dividends, with nowhere near $6 billion in earnings. That can be fine if the balance sheet is good and it really is temporary.

I'm hoping to make time soon to dig into the financials a little deeper.

[kolpin]

(12-20-2021, 09:28 PM)Kerim Wrote: Yeah, I get those arguments, thanks. But you can't pay dividends out of 'adjusted' earnings. If my math isn't awful, they're paying out more than $6 billion a year in dividends, with nowhere near $6 billion in earnings. That can be fine if the balance sheet is good and it really is temporary.

I'm hoping to make time soon to dig into the financials a little deeper.

I'm worried about MO's balance sheet too. 

I used to be in the camp of "getting paid while I wait" with stocks, but I've shifted in the last couple of years to 'if I see warning signals, I'd rather get out sooner rather than later" camp. That's not to say I sell at the first sign of "smoke" (hardy har), but MO's less than stellar acquisitions, coupled with a secular decline in smoking and the IQOS decision presenting the latest legal setback--all together set off fire alarms. I have no idea if it will take 1 year or 10 years for a dividend cut to occur, but I'm fairly certain that management will continue to make decisions which erode shareholder value. 

I hope to continue selling my MO position in 2022, and exit it completely in 2023 (tax implications).

[cemanuel]

I'm with Eric here. Revenues and cash flows are continuing to increase. The balance sheet isn't the fortress it was in 2018 before Juul and Chronis but it's still solid.

This has my "quick look" chart for the most important metric over time; revenues: https://www.nasdaq.com/market-activity/s...evenue-eps 2021 looks like it may end up being flat/stagnant over 2020 but provided the patent issue with IQOS gets worked out which I expect will happen, I believe it will continue growing cash flows over time.

As I do with everything I own; once MO releases its AR I'll dig into it. I may see something that worries me. If so I may change my opinion but for now I'll hold.

I will be selling it in my Roth as I want it to be growthier. I have a target sell price of $50 but depending on the market I may sell tomorrow after ex-div, as of today to pick up WSM and BBY. This dip is a nice opportunity. Just wish I had the IRA available now.

[fenders53]

I sold covered calls in the top half of the trading range until my MO shares went away. I wasn't particularly worried about the near-term dividend prospects but the unending and unpredictable pressure from regulatory agencies coupled with the lack of total return makes me believe I have better options for the long-term. I could be wrong but I believe MO share price will be confined to a range until there is a very notable change in the business model. Initial attempts didn't go well of course. I'm confident they are not done trying.

MO would be tempting on a 20% pullback. Traders know the dividend gang will rescue it. I don't see that changing for years. I don't blame people that just want to hold it. They might end up with a 6% average total return for the next decade. That might be market average or better. That we can't know.

[Kerim]

Hmm. Looking at annual reports for the past 5 or 6 years, it looks like MO is not weathering this storm from a big cash pile. Cash and equivalents, and total current assets have stayed pretty static in the $4 to 7 billion range from 2015 to present. That's not enough to meet the dividend commitment, much less along with other costs. The number that does seem to be changing a lot is debt. 

Long-term debt was 12 to 14 billion in 2015/2016, but up to 27 billion in the 2020 report, though it does seem to be down a hair in the Q3 2021 report.

Given MO's revenue stream and the current interest rate environment, I don't think any of that is horrifying. But I certainly wouldn't characterize it as safe, sustainable, or healthy.

I guess I'm not inspired to jump over to my brokerage to sell. But I'll be looking at Q4 and the next AR incredibly closely.

[fenders53]

(12-21-2021, 09:53 AM)Kerim Wrote: Hmm. Looking at annual reports for the past 5 or 6 years, it looks like MO is not weathering this storm from a big cash pile. Cash and equivalents, and total current assets have stayed pretty static in the $4 to 7 billion range from 2015 to present. That's not enough to meet the dividend commitment, much less along with other costs. The number that does seem to be changing a lot is debt. 

Long-term debt was 12 to 14 billion in 2015/2016, but up to 27 billion in the 2020 report, though it does seem to be down a hair in the Q3 2021 report.

Given MO's revenue stream and the current interest rate environment, I don't think any of that is horrifying. But I certainly wouldn't characterize it as safe, sustainable, or healthy.

I guess I'm not inspired to jump over to my brokerage to sell. But I'll be looking at Q4 and the next AR incredibly closely.

Sounds rational to me.  There is also nothing stopping you from trimming gradually over time while you assess the future. That tends to work better for me actually.  BTW you would be mocked for daring to question MO on some other forum echo chambers.  I like this place.  

There is a very good reason why MO-T-XOM etc. have, or still have a way above market average yield.  Obviously share prices fell while most everything quality is up 50-200% the past 5 years.  If you bother to know what you truly own with CURRENT financials, that makes you a  better investor.  Just hoping things are as they were five or ten years ago is just that, hoping.  

On a side note MO and T have taught me that  M&A is far from easy.  It goes wrong as often as it goes right.

[Scooterd]

(12-21-2021, 09:53 AM)Kerim Wrote: .......and it has always happily resided in the “never sell” corner of my holdings. - Kerim

I never say "never sell" and I do have quite a lot of patience.

I do follow "Rarely Sell" - If a companies fundamentals have continued to deteriorate over a substantial period of time, If the companies overall business strategy has changed (That I do not agree with and thus my reason for investment no longer exists), Intrinsic corporate Value continues a lengthy decline, Continued lower market guidance over numerous quarters / years and long-term prospects show no indications for reversal. Loss in faith of management and board to turn business around. (For consumables a substantial long term shift in public sentiment/trends).  

If a Security I have invested in dips significantly I try and determine is this a permanent shift or just short term hurdle. If short term; I Invest more capital.
If I liked the investment at X , I "really like it" while on sale at Y. If a "continuous" drop in share price is an indication of continued lengthy downturn - I cut my losses.

** The only exception to above is Berkshire (as these shares are not for me), They are my financial legacy for my Nephews on my passing, I Feel I am just the steward. **

Just my 2 cents (Others mileage may vary, and usually does)

 - Scoot

"If you're going to put money at risk, make sure the reward is high enough to justify the time and effort you put into the investment decision".- Michael Steinhardt

“Faced with the choice between changing one’s mind and proving that there is no need to do so, almost everyone gets busy on the proof.” — John Kenneth Galbraith

[kolpin]

(12-21-2021, 06:42 AM)cemanuel Wrote: I'm with Eric here. Revenues and cash flows are continuing to increase. The balance sheet isn't the fortress it was in 2018 before Juul and Chronis but it's still solid.

This has my "quick look" chart for the most important metric over time; revenues: https://www.nasdaq.com/market-activity/s...evenue-eps 2021 looks like it may end up being flat/stagnant over 2020 but provided the patent issue with IQOS gets worked out which I expect will happen, I believe it will continue growing cash flows over time.

As I do with everything I own; once MO releases its AR I'll dig into it. I may see something that worries me. If so I may change my opinion but for now I'll hold.

I will be selling it in my Roth as I want it to be growthier. I have a target sell price of $50 but depending on the market I may sell tomorrow after ex-div, as of today to pick up WSM and BBY. This dip is a nice opportunity. Just wish I had the IRA available now.

While I don't see MO's dividend cut as imminent, the question is, can MO's balance sheet withstand another bad acquisition or another legal judgment against them, etc? I think they're on the edge.

I felt similarly about T in April of 2021. I didn't think a dividend cut was on the horizon when I sold, but its debt was high, they had a record of mismanagement, its Simply Safe Dividend score had just been knocked down a few pegs, and I thought that any additional missteps would put it over the edge. 

The only difference in my treatment of my T position then and my MO position now are the tax ramifications. With T, it was in my IRA and I had no big gains to worry about.

[Kerim]

(12-21-2021, 10:34 AM)Scooterd Wrote: If a Security I have invested in dips significantly I try and determine is this a permanent shift or just short term hurdle. If short term; I Invest more capital.

Me too, so long as the original investing thesis holds. Given the concerns I've expressed above, I am for sure not adding to my MO position soon. Maybe I'd change my tune in 2022 if it becomes clear that is this just short term pain. Anyway, I think there are better opportunities right now, and my DG portfolio is already almost 20 percent tobacco!

Thanks everyone for helping me think this through.

Any thoughts or predictions about MO's marijuana prospects? I think a lot of MO investors are assuming with little basis that this will eventually be a big revenue stream for MO. Maybe, but I'm not as optimistic about it as many people seem to be.

[vbin]

Marijuana will never be as big as tobacco. The space is already crowded and have a lot of local availability (compared to almost none in tobacco). They might see some growth in Marijuana but people thinking it will be a big business like tobacco or can replace tobacco are mistaken. When consumed for recreational uses, marijuana has and will always have that taboo associated with it.

Fastgraph does show the adjusted earnings growing for MO so not sure where your concern for earnings coming from. Care to elaborate?
(I hate that Fastgraph doesn't show debt)