I'm Worried About MO

[cemanuel]

I last ran MO's debt in March. Debt:ebitda was 1.88. Pre-Chronos it was around 1. Still not concerning for me - I start to look closer at 2.5 and above. I'll run it again after the 4th quarter ER.

[Kerim]

I agree completely about marijuana, and then some.

As to earnings, "adjusted" earnings are essentially a fabrication. "Adjusted" earnings means "what we would have earned if things hadn't gone differently." MO's adjusted earnings look fine, but their ACTUAL earnings -- the ones used to pay dividends, salaries, etc, have been terrible for the last few years, largely as a result of writing down the juul disaster.

[fenders53]

(12-21-2021, 10:46 AM)Kerim Wrote:

(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.

I'm not sure how they would command any sort of pricing power like they do in tobacco.

[Kerim]

(12-21-2021, 12:01 PM)fenders53 Wrote: I'm not sure how they would command any sort of pricing power like they do in tobacco.

I agree completely. And for a bunch of other reasons as well, I think the "MO is going to make a lot of money in marijuana" is super wishful thinking. But it is really common thinking!

[fenders53]

(12-21-2021, 12:58 PM)Kerim Wrote:

(12-21-2021, 12:01 PM)fenders53 Wrote: I'm not sure how they would command any sort of pricing power like they do in tobacco.

I agree completely. And for a bunch of other reasons as well, I think the "MO is going to make a lot of money in marijuana" is super wishful thinking. But it is really common thinking!

They would have distribution advantages that might be advantageous decades from now if the industry consolidates which is not a certainty.  I don't use MJ but my friends that do seem to prefer to acquire it in various ways.  Some like the boutique atmosphere.  Some just use black market sources as they have for many years.  I don't see them running to a convenience store to pay any kind of premium price. 

I liken it to my Wisconsin brewery story I often share.  In the 1800's WI had over 600 breweries.  Perhaps the largest per capita in the US.  98% of them were local and small of course.  100 years later WI still had a few dozen breweries and a few majors that kept all of the little guys in poverty until they acquired them or put them in BK.  The 4-5 major US brewers that were dominant 30 years ago are now mostly owned by foreign entities and struggling some.  Meanwhile Wisconsin now has 200 breweries.  Most of them are small and doing pretty well locally or regionally.  I will plan a meal stop at one of them and drive out of my way numerous times a year.   I pay a 100% premium over the cost of a Budweiser and have for decades.  There is really no way to know where the MJ trend is headed in 10-20 years.  We cant wait 10-30 years to be right.

All that said MO will chug right along paying a good dividend for years IMO.

[ken-do-nim]

Kerim, I'm curious, given your current work hiatus, are MO dividends responsible for a good chunk of paying your bills?

[Kerim]

Fenders -- I'm with you. I have lots of friends that use mmj regularly, and it is hard to imagine any of them ever buying Altria / Marlboro joints if there are alternatives available.

Ken -- sadly, no. My monthly expenses are REALLY high, thanks to divorce and having a daughter with severe medical issues, not to mention my taste for the finer things in life (lol!). So I don't think dividends will ever cover it all. So for now I am just living off savings (that never got invested) and all dividends get pooled and reinvested to keep the stream growing. With luck, eventually, dividends, pension, and social security (?) will cover most of my expenses once the alimony rolls off in another six years or so. But I'll almost certainly be eating into the principle (selling core shares) before it is all said and done.

That is, unless one of my crypto gambles or zany business ideas pans out. Then it's caviar and health care for everyone!

[fenders53]

(12-21-2021, 10:05 PM)Kerim Wrote: Fenders -- I'm with you. I have lots of friends that use mmj regularly, and it is hard to imagine any of them ever buying Altria / Marlboro joints if there are alternatives available.

Ken -- sadly, no. My monthly expenses are REALLY high, thanks to divorce and having a daughter with severe medical issues, not to mention my taste for the finer things in life (lol!). So I don't think dividends will ever cover it all. So for now I am just living off savings (that never got invested) and all dividends get pooled and reinvested to keep the stream growing. With luck, eventually, dividends, pension, and social security (?) will cover most of my expenses once the alimony rolls off in another six years or so. But I'll almost certainly be eating into the principle (selling core shares) before it is all said and done.

That is, unless one of my crypto gambles or zany business ideas pans out. Then it's caviar and health care for everyone!

So you move on and assign a low probability MJ is meaningful for MO soon. They know that as well and are surely working other growth opportunities.  It's hard to walk away from that dividend.  I'd trim up top if you wish, and never add unless it really dips.  I did leave but it wasn't an emergency iMO.  The opportunity cost of these high yielders has made me not care if I own them or not.

[ken-do-nim]

(12-21-2021, 10:05 PM)Kerim Wrote: Ken -- sadly, no. My monthly expenses are REALLY high, thanks to divorce and having a daughter with severe medical issues, not to mention my taste for the finer things in life (lol!). So I don't think dividends will ever cover it all. So for now I am just living off savings (that never got invested) and all dividends get pooled and reinvested to keep the stream growing. With luck, eventually, dividends, pension, and social security (?) will cover most of my expenses once the alimony rolls off in another six years or so. But I'll almost certainly be eating into the principle (selling core shares) before it is all said and done.

That is, unless one of my crypto gambles or zany business ideas pans out. Then it's caviar and health care for everyone!

That's quite a pile of savings you must have (had).  I know if I stopped working now, I'd be crushed by the expenses.  I'd probably have to withdraw my 401k at a huge penalty to get by.  When exactly my child support ends is a bit of a mystery.  It could end in 3 years, or it could go on another 7.  Best of luck with your daughter's medical issues.

[Kerim]

Just dusting this thread off to note that MO just completed its third consecutive full calendar year with actual earnings well below the dividend. For 2021, the dividend payout ($3.48) was waaay more than twice actual earnings ($1.34). Yeah, yeah, I know that "adjusted" earnings look robust, once you've factored out the never ending costs of recent missteps. And that the dividends are less than those "adjusted" earnings. But it is actual earnings that matter.

On the other hand, it does appear that revenues are holding up (more or less the same in 2020 and 2021 at $26 billion). And cash on hand has actually risen considerably from 2020 to 2021 (which I really don't understand how that's possible given the disparity between earnings and dividends I'm fixated on). And the JUUL and other drags have to lighten up eventually? I guess?

I'm still holding all my shares. Fenders is right that it would be hard income to replace. But I'm watching this on more carefully than I even have before.

[fenders53]

They are supposedly targeting 80% payout ratio. Dividend is still covered by FCF. They will need to avoid M&A unless it is instantly accretive. I assume dividend growth will remain minuscule. They can probably cut costs and keep this working. Obviously management knows that MO has no reason to exist other than the dividend, and remain focused. They have little room for further errors. That and never ending regulatory risk I can't know grew tiresome. You are wise to keep an eye on them. I saw a quote on another site.

"Don't panic, but if you are going to panic, always panic first".

[Kerim]

(01-29-2022, 03:47 AM)fenders53 Wrote: Dividend is still covered by FCF.

Dusting this thread off yet again, because I am getting the feeling that I have some fundamental misunderstandings that I would like to correct. I hope I'm just missing something obvious and simple -- I must be -- but haven't been able to figure it out on my own, yet.

I've been fixated on Fenders' statement that MO's dividend is still covered by FCF. The dividend certainly isn't covered by net earnings, and so I've been trying to understand how FCF can be so much higher than earnings. Maybe for a quarter or two here and there, but having a dividend higher than earnings for a sustained period of time, as MO is now doing, just seems like shenanigans to me!

So I get that FCF is calculated by taking net cash from operating activities and subtracting capital expenditures. Using figures from MO's 2021 Annual Report, that is 8,405 minus 169, resulting in a FCF value of $8,236 (in millions). Great so far. That does indeed more than cover the $6,446 in dividends paid out in 2021. In fact, it falls right about at the 80 percent target.

BUT BUT BUT....

$6 billion of MO's $8.4 billion in FCF for 2021 comes from "losses from equity investments" ($5,979, if you're looking for it -- see page 54 of the 2021 annual report).

As best I can tell -- and again I may be completely misreading things -- this $6 billion is a result of using the equity method of accounting for its ownership stake in ABI (see pages 64-65 of the annual report).

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?

(If you're willing to dig into the 2021 annual report with me, the simplest thing to do might be to word search for "5,979" -- that will take you to all of the relevant spots I've been looking at and trying to make sense of).