I'm Worried About MO

[fenders53]

An accountant I absolutely am not, but a lot of this is writing off goodwill assets from the balance sheet. At the time of purchase BUD and MO were paid for with 2019 (or whatever year last decade cash). They presumably have value at the time and have to be placed on the balance sheet. Per GAAP rules the assets must be written down to fair value. There may be some wiggle room for subjectivity, but I think we can all agree the JUUL investment might not actually be worth the the $12B or whatever they paid. If they win the JUUL appeal it has some value, but it's not looking great for now. They already wrote off 90% of that the past few years. I believe these are NON cash transactions. That money was spent years ago. But the business just lost book value. Wrapping my head around that doesn't seem too complicated, but there are so many non-GAAP accounting entries I don't really understand.

All that said I got very light on MO for a reason. The government drama never ends. We never know what might come to reality. Tobacco could survive a menthol ban if the party that does it wants to lose some votes. The real scare is the FDA intent to rduce nicotine to non-addictive levels. That is a nicotine ban pure and simple. Is anyone going to buy and smoke a carton of cigarettes a day trying to get the nicotine they used to get from half a pack? Of course not. It would be like trying to get an alcohol fix off near beer. You can't drink enough to get a buzz.

All that said, MO dividend is fine for now. Nothing has actually changed. But it's the same old story.

[cemanuel]

"And as far as I can tell, it is a $6 billion LOSS. From page 13 of the report: "As a result, we recorded a non-cash, pre-tax impairment charge of $6.2 billion for the nine and three months ended September 30, 2021 to (income) losses from equity investments in Altria's condensed consolidated statements of earnings (losses)"

So.... how exactly does a $6 billion paper LOSS in its ABI investment become POSITIVE cash flow that somehow covers the actual dividend?"

Fenders touched on this but goodwill write-downs don't impact cash flows. This is one of the reasons I pay zero attention to equity-based debt levels but focus on cash flows.

But those write-downs are calculated as a business loss that show up on income statements and in earnings. For folks who have never owned/managed a business let me offer an example.

Let's pretend my personal life is a business with things like a balance sheet and incomes and cash flows (which we actually have, we just don't report it in corporate financials).

Let's say I own a second, potential retirement, home valued at $300k.

Let's say I pay a dividend to my two kids in the form of a $25/wk allowance for each.

The home is condemned - it sits on a toxic waste site and I didn't bother to request an environmental assessment when I bought it (damn radio infomercials!). The value goes to zero.

This is a $300k business loss. I report it on my balance sheets. I also report it on my income statements as a loss and, if such things entered into the taxable world, to the IRS as a loss. During the year this condemnation occurs I report a $220k loss - the $300k vs my $80k salary.

But I still have my job. It's not my primary residence so the $300k write-down doesn't impact my expenses. I still have plenty of cash flows to buy groceries, put gas in the car, etc. And I can issue the weekly $50 allowance/dividend to my kids.

Looking at a company's debt:equity has some value as it's an item considered for credit ratings and the cost to a company of accessing credit. But I look at *debt:ebitda when considering dividend safety. Can the company a) service its debt out of cash flows and b) safely maintain and/or grow the dividend?

*debt:ebitda is the closest readily available metric but what I really want is debt:cash flows so I have to check to be sure things match up on income statements, they usually do.

[fenders53]

That was a great way of illustrating it. My initial screen on a dividend stock is fairly uncomplicated. Over the past ten years I want to see FCF that covers the dividend, so a reasonable payout ratio. A quick look at debt trend. I don't worry much if there is one year messing up the average (I will find out why of course). I also need to see hope of continued revenue growth. Accounting tricks are plentiful, but you can only pull a rabbit out a hat for so long. That may well be where MO is heading eventually, but for now they find a way.

[cemanuel]

I have a full MO position myself and it's my largest income provider, at least in my Taxable Account. I don't own it in the IRAs - ABBV beats it overall.

It's the sort of company that I think will give plenty of warning signs before cutting. Payout ratio will be the first danger sign for me - and over a couple of years, not quarters. Minor, penny-a-quarter annual hikes will be another. Raising debt to maintain the dividend a third. It will try to maintain as long as it can.

If the time comes where I think a cut is a real risk I'll start slowly reducing my ownership, likely down to about a half-position. Will I like swapping out 8-9% yield for 3-4%? Not at all. But I did it with T and it didn't hurt me much. For now I consider the dividend safe.

[fenders53]

(06-29-2022, 07:24 AM)cemanuel Wrote: I have a full MO position myself and it's my largest income provider, at least in my Taxable Account. I don't own it in the IRAs - ABBV beats it overall.

It's the sort of company that I think will give plenty of warning signs before cutting. Payout ratio will be the first danger sign for me - and over a couple of years, not quarters. Minor, penny-a-quarter annual hikes will be another. Raising debt to maintain the dividend a third. It will try to maintain as long as it can.

If the time comes where I think a cut is a real risk I'll start slowly reducing my ownership, likely down to about a half-position. Will I like swapping out 8-9% yield for 3-4%? Not at all. But I did it with T and it didn't hurt me much. For now I consider the dividend safe.

As long as MO can hold 40 it seems worth holding.  If it trends down towards 30 then not so much.  The dividend is to attractive.  At some point news fades and it tries to recover.  I do hear people talking about $60 price targets when it runs a little.  That seems delusional.  The government will jump out of the bushes and knock them down every time.  My MO is in an IRA so it's a little easier to change my mind on price swings.

[bankerboy]

MO certainly has fallen in value, can in reinvent itself away from its current products is what I ask myself. And why I don’t own any….


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[Kerim]

A month or two I trimmed a tiny bit of my substantial allocation of MO. But also I'm heartened to see they've put together a few relatively stable-looking (if not kind of even good-ish) quarters in a row.