BTI / Tobacco Generally

[Kerim]

I guess what I'd really like to kick around in this thread is whether BTI is a yield trap. Its yield is unusually high right now, but it is well covered by earnings, and the payout ratio isn't all that high. MO, in contrast, has flirted with greater than 100 percent payout ratio in recent years, making me much more wary.

Yes, in the very long term, tobacco probably does not have that bright a future, but it seems like everyone is acting like the whole world is going to be forced to stop smoking next year, which just isn't going to happen.

I've been buying BTI lately, but I am close to a true "back up the truck" moment. Maybe not as a 20 year hold, but at least five or ten. This is a huge company with huge, current, and real revenues that amply cover the 8.5 percent yield. This company is not about to disappear. Yes, the share price could go lower, but how much lower could it go in the short term (ha! famous last words)?

My most nagging fear is that even a cheap stock can get hit when a market as toppy as this one swoons. But if my conviction is high, then I'd just buy more then, I suppose. If my nerves don't get the best of me.

All thoughts appreciated!

[fenders53]

You sure you can handle the truth?

Disclaimer, I own MO and BTI. About 3% of my port so enough that I care, but purely an income game for me because that has mostly worked for years if I was careful with my entry. Under my definition of yield trap they absolutely are. The dividend is great, but history says you may give all or most of it back in capital loss. They have clearly been traps the past five years, and here is why I believe that may continue.

-Core business is not growing, and it's highly likely it ever will.
-Regulators are on them constantly. Always looking for a new way to squeeze them (menthol ban)
-They try to invest in a safer alternative and the GOV still fights them.
-Unending threat of increased tobacco taxes. It just kills volume. Already insane in major cities/states right at $10 per pack. There is some limit.
-Forbidden by ESG and that is gaining momentum. Not going away.
-Everything MO has tried has turned sour. Rapidly dumping their investments of the past 5 years.
-BTI has similar struggles.

IMO they are nothing but a trade. I bought MO a lot cheaper and wouldn't be here still if not for option income games. They may be 10% higher in six months, or lower. I won't load up. There are better ideas out there with a better total return outcome likely. The fundamentals don't matter anymore beyond their ability to pay the next dividend. PEs are lower than historical because they are unending drama. The real problem for me is opportunity cost. All this happened while the market was flying and I don't want to know how they perform in a tough market when high quality stocks are cheap again. I hope I am wrong because I have some shares to dump. I was trying to leave MO at $50. If necessary I'll just keep selling covered calls and chiseling my basis down until I can leave at a cheaper price. I sold calls literally the day before this last dip.

[crimsonghost747]

(10-02-2021, 09:52 AM)Kerim Wrote: I guess what I'd really like to kick around in this thread is whether BTI is a yield trap.

Yes.
Can I close this thread now? 

No but in all seriousness, I haven't even looked at these companies in years so I'm a bit out of touch with their current financials etc. So I can't really comment on any of the numbers apart from agreeing that the dividend is super nice and that if the payout ratio is relatively low over the past several years then it's quite likely that they can keep paying it for the next several years.

But the thing here is that what is the investment thesis when it comes to the business model? Because in my view their business model is dying. It's not a sudden stop, it's a slow bleed caused by changes in what is being considered cool, the increase in financial awareness, increase in ESG awareness, regulatory issues, the rise of alternatives which are superior in many ways. 

There is also a HUGE shift to "trying out new and different things". Compare, well almost anything, to 20 years ago. People are not buying the same old stuff, they want something new. Beer? It's not budweiser, it's some fancy IPA. Or worse yet, one of those horrible seltzer things. Hotel? It's probably not Marriott, it might be an airbnb in an igloo. Vacation? All inclusive hotel package at a beach resort? Nah it'll be a bit more exotic. Fruit? Oranges... nah let's go for avocado and passion fruit. I guess you see where I'm going with this: smoking? It won't be Lucky Strike, it'll be a fancy flavor thing, a real cuban cigar, some quality snuss, or another thing that we haven't heard of yet. This is a trend that will keep intensifying. 

Looking purely at the business model and disregarding the financial info, what is the reason you want to invest in tobacco companies? Will smoking be cool again? Will they finally be able to succeed in this alternative game that they have been failing to do for over a decade? What is the reason that will make these companies successful in the next decade or two? 

The dividend is nice. But if these companies can't turn things around then you will probably match their performance if you put $1000 in a jar and take out $20 every quarter.

[fenders53]

(10-02-2021, 01:19 PM)crimsonghost747 Wrote:

(10-02-2021, 09:52 AM)Kerim Wrote: I guess what I'd really like to kick around in this thread is whether BTI is a yield trap.

Yes.
Can I close this thread now? 

No but in all seriousness, I haven't even looked at these companies in years so I'm a bit out of touch with their current financials etc. So I can't really comment on any of the numbers apart from agreeing that the dividend is super nice and that if the payout ratio is relatively low over the past several years then it's quite likely that they can keep paying it for the next several years.

But the thing here is that what is the investment thesis when it comes to the business model? Because in my view their business model is dying. It's not a sudden stop, it's a slow bleed caused by changes in what is being considered cool, the increase in financial awareness, increase in ESG awareness, regulatory issues, the rise of alternatives which are superior in many ways. 

There is also a HUGE shift to "trying out new and different things". Compare, well almost anything, to 20 years ago. People are not buying the same old stuff, they want something new. Beer? It's not budweiser, it's some fancy IPA. Or worse yet, one of those horrible seltzer things. Hotel? It's probably not Marriott, it might be an airbnb in an igloo. Vacation? All inclusive hotel package at a beach resort? Nah it'll be a bit more exotic. Fruit? Oranges... nah let's go for avocado and passion fruit. I guess you see where I'm going with this: smoking? It won't be Lucky Strike, it'll be a fancy flavor thing, a real cuban cigar, some quality snuss, or another thing that we haven't heard of yet. This is a trend that will keep intensifying. 

Looking purely at the business model and disregarding the financial info, what is the reason you want to invest in tobacco companies? Will smoking be cool again? Will they finally be able to succeed in this alternative game that they have been failing to do for over a decade? What is the reason that will make these companies successful in the next decade or two? 

The dividend is nice. But if these companies can't turn things around then you will probably match their performance if you put $1000 in a jar and take out $20 every quarter.

I'm bored so I will pile on some more. 

There is considerable validity to what Crimson shared.  I started a 401K for my daughter a few months ago.  Sent her an email and told her I wanted some input since it was her money.  She responded with a list of random thoughts.

Nothing that is polluting the world.  Oil and ocean plastic pollution.

No tobacco, seen it kill too many relatives, but weed is OK if it might make money.

Does AirBNB have stock?

Something involving animals or pets would be good.  Absolutely no food companies mistreating livestock.  Very against that.

23yr old that doesn't know what a dividend or ESG even is but she and her friends are onboard with Crimson's thoughts.  They consciously avoid supporting things they are opposed to.

[Kerim]

I don't disagree with anything you guys have said, really. But I do disagree as to timing and scope. Sure, I get that an educated and affluent millennial in the US may not want to profit from tobacco, and that it is "out of favor" with the ESG crowd. But that and everything else you've mentioned is really old news. This company sells its products all over the planet, and consistently earns many billions of dollars in revenues for it. And the price right now is incredibly low, so I think the downside risk is minimal.

I never thought I'd get tot his point, but I actually could imagine getting rid of all of my oil stocks before my tobacco. I think the landscape for energy is changing much faster than the declines in smoking rates.

If I could get a CD paying 8.5 percent right now, I'd likely liquidate all of my stocks and just do that (assuming it was low risk). BTI at these levels is feeling a bit like that to me right now. (And again, I don't put MO in the same bucket right now, even though it has been one of my largest positions and best performers over the years.)

And again, I'm not calling this a lifetime hold, but I think the doom and gloom on tobacco is, as it has been for decades, just overblown. I do worry about it in a market-wide swoon, as I said before, but there are few safe places in that case.

If I have time tonight or tomorrow (though it is doubtful), I may do a deeper dive on the financials in making plans for the week.

[fenders53]

(10-02-2021, 04:55 PM)Kerim Wrote: I don't disagree with anything you guys have said, really. But I do disagree as to timing and scope. Sure, I get that an educated and affluent millennial in the US may not want to profit from tobacco, and that it is "out of favor" with the ESG crowd. But that and everything else you've mentioned is really old news. This company sells its products all over the planet, and consistently earns many billions of dollars in revenues for it. And the price right now is incredibly low, so I think the downside risk is minimal.

I never thought I'd get tot his point, but I actually could imagine getting rid of all of my oil stocks before my tobacco. I think the landscape for energy is changing much faster than the declines in smoking rates.

If I could get a CD paying 8.5 percent right now, I'd likely liquidate all of my stocks and just do that (assuming it was low risk). BTI at these levels is feeling a bit like that to me right now. (And again, I don't put MO in the same bucket right now, even though it has been one of my largest positions and best performers over the years.)

And again, I'm not calling this a lifetime hold, but I think the doom and gloom on tobacco is, as it has been for decades, just overblown. I do worry about it in a market-wide swoon, as I said before, but there are few safe places in that case.

If I have time tonight or tomorrow (though it is doubtful), I may do a deeper dive on the financials in making plans for the week.

It is old and persistent news that has cut BTI share price in half during about the best five year run in our investing lifetime.  What I think you need to convince yourself of is what changes the trend. Total annual return with dividends since JAN 2017 is -3.27%

I own shares so I would be pleased to hear optimistic thoughts.

[Kerim]

(10-02-2021, 05:18 PM)fenders53 Wrote: It is old and persistent news that has cut BTI share price in half during about the best five year run in our investing lifetime.  What I think you need to convince yourself of is what changes the trend.  Total annual return with dividends since JAN 2017 is -3.27%

Totally good and fair point, but entry price is everything, right? Are they about to cut the dividend with a payout ratio in the 60s? Is the price just going to continue to decline to zero in the next five years despite billions in revenue? It is totally fair to ask what my buy thesis is -- and I guess that I'm betting that the price will stay flat to rise from here over the next 5 to 10 years, while I collect a monster dividend. I understand the ills of the tobacco sector, but what is the down side thesis? That for all of the reasons you both have enumerated the share price is just going to drift down forever from here, even though the company is enormously profitable and showering cash on shareholders? Yeah, there is risk, but it seems pretty contained to me, and well compensated by the divvy.

I know I sound like a PSA for confirmation bias here, but...

[fenders53]

I just bought BTI a few points ago.  We'll see what happens.  I usually sell covered calls on yield traps but it dipped fast on me this time.

[groundbreaker00]

I’ve heard noting but positive upbeat recommendations for BTI. I don’t own it, but all the reading I’ve done tells me good things. Best of luck


Sent from my iPhone using Tapatalk

[crimsonghost747]

(10-02-2021, 07:32 PM)Kerim Wrote:

(10-02-2021, 05:18 PM)fenders53 Wrote: It is old and persistent news that has cut BTI share price in half during about the best five year run in our investing lifetime.  What I think you need to convince yourself of is what changes the trend.  Total annual return with dividends since JAN 2017 is -3.27%

Totally good and fair point, but entry price is everything, right? Are they about to cut the dividend with a payout ratio in the 60s? Is the price just going to continue to decline to zero in the next five years despite billions in revenue? It is totally fair to ask what my buy thesis is -- and I guess that I'm betting that the price will stay flat to rise from here over the next 5 to 10 years, while I collect a monster dividend. I understand the ills of the tobacco sector, but what is the down side thesis? That for all of the reasons you both have enumerated the share price is just going to drift down forever from here, even though the company is enormously profitable and showering cash on shareholders? Yeah, there is risk, but it seems pretty contained to me, and well compensated by the divvy.

I know I sound like a PSA for confirmation bias here, but...

The downside thesis is what we have seen playing for the past years already. The share price will decline because the future outlook of the company is getting weaker all the time. And at some point, whether it's next year, in 5 years or in 15 years, that weakening outlook will start to hit earnings in a serious way. I agree that this won't happen anytime soon, but I do think it will happen. 

The next phrase is not about tobacco, it's about investing in general: I just don't see the point in investing in a dying business model. 
This is not to say that BTI won't be a profitable investment. If they can keep the dividend at current levels for the next decade then you will have almost gotten everything back in dividends... so even if the share price will be cut by 50% then you'll still be in the green. I just think there are tons of companies that are safer and will very likely provide better overall returns during the next decade or so, while still paying a decent (~3%-ish) dividend in the process. Not to mention the fact that these other companies might be good for a lifetime hold.

[fenders53]

Don't get run over Crimson.  I think he is backing up the truck.  

I hope it works out.  A lot of forum members own BTI.

[bankerboy]

(10-02-2021, 09:52 AM)Kerim Wrote: I guess what I'd really like to kick around in this thread is whether BTI is a yield trap. Its yield is unusually high right now, but it is well covered by earnings, and the payout ratio isn't all that high. MO, in contrast, has flirted with greater than 100 percent payout ratio in recent years, making me much more wary.

Yes, in the very long term, tobacco probably does not have that bright a future, but it seems like everyone is acting like the whole world is going to be forced to stop smoking next year, which just isn't going to happen.

I've been buying BTI lately, but I am close to a true "back up the truck" moment. Maybe not as a 20 year hold, but at least five or ten. This is a huge company with huge, current, and real revenues that amply cover the 8.5 percent yield. This company is not about to disappear. Yes, the share price could go lower, but how much lower could it go in the short term (ha! famous last words)?

My most nagging fear is that even a cheap stock can get hit when a market as toppy as this one swoons. But if my conviction is high, then I'd just buy more then, I suppose. If my nerves don't get the best of me.

All thoughts appreciated!

EPD at 8.26% is Mr. Valuations recent pick. Energy company MLP. I don’t own any as I consider it a value trap.

I might when I get closer to retirement however!


Sent from my iPhone using Tapatalk