12-20-2021, 04:40 PM
(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.