Altria

Put that in your pipe and smoke it!

Who still remembers the old Westerns? A cool cowboy casually lights a cigarette and rides off into the sunset on his horse. Even today, the cool macho guy in movies is always shown with a cigarette. Smoking is simply iconic! But in today's society, smoking is becoming less and less cool. Part of that is surely down to the long-term health damage, or to the steadily rising price of cancer sticks.

On the stock market, too, tobacco stocks like Marlboro maker Altria have been under increasing pressure for a few years now - but are these price declines a risk warning for us long-term shareholders, or maybe a chance to buy in cheaper? After all, the companies are investing heavily in more future-oriented products, such as e-cigarettes or cannabis products. Luckily, Altria is broadly diversified and its dividend policy is top-notch - so I can sleep soundly with my investment ...

The origins and business model of Altria Group Inc.

In 1822, George Weyman opened a tobacco shop in Pittsburgh. There he sold his own product, Copenhagen Snuff. It was so popular that his sons later took over the business. More production sites were quickly built to keep growing. Almost 180 years after its founding, the company name was finally changed to U.S. Smokeless Tobacco Company. Today it is the largest smokeless tobacco company in the world.

Philip Morris was a tobacco merchant who opened a shop on London's Bond Street in 1847. Back then, he imported fine cigarettes and sold them to his customers. It wasn't until 1854 that he made his own cigarettes, which were hard to sell at first. So he offered coachmen a lucrative commission if they brought him customers asking for cigarettes. His brand quickly became better known, and Morris even became the personal tobacconist of King Edward VII.

John Middleton also founded his tobacco business in the 19th century, in 1856 to be exact, in Philadelphia. But he didn't sell snuff or cigarettes - he sold cigars. A little later, pipe tobacco was added. Of course, business was booming here too, so after his death his family opened more branches and even a mail-order business. Today John Middleton is one of the largest American cigar manufacturers.

In 1934, several winemakers from the Seattle area joined forces and founded the National Wine Company, NAWICO for short. The name was later changed to Ste. Michelle Wine Estates.

In 2003, the Altria Group was created. It is the parent company that today owns and manages the 4 companies described above. Even though Philip Morris International was spun off in 2008, Altria controls about half of the cigarette market in its home market, the US, with Marlboro and L&M. On top of that, cigars, pipe tobacco, chewing tobacco and snuff, as well as various wines, provide steady revenue. Most recently, the company has invested heavily in e-cigarettes and the cannabis market.

What can shareholders expect from Altria in the future?

As I wrote in the introduction, tobacco companies aren't having an easy time right now. Besides shock images on cigarette packs, smoking and advertising bans are also weighing on the industry. Now the health authority is even calling for lower nicotine levels in cigarettes, so that fewer consumers would become addicted or could give up the habit more easily. If you look at Altria's share price, you can clearly see that it hasn't come through this trend unscathed - not yet!

Altria is currently in the middle of a restructuring process. For example, more than 1.8 billion US dollars were spent on the Canadian cannabis producer Cronos. Growing and selling marijuana was legalized there a few months ago. In some US states, too, the drug has already been decriminalized - either completely for recreational use or at least as a medical alternative. But Altria has invested much more heavily in the e-cigarette market leader Juul. The 35% stake cost a whopping 13 billion US dollars. Besides Juul, Altria also launched its own IQOS heated tobacco device together with its former subsidiary Philip Morris. Heating produces significantly fewer harmful substances than burning. These investments will surely pay off soon.

Are dividend hunters served here too?

Definitely YES! Altria has been paying a quarterly dividend to its shareholders since 1928. Back then still under the name Philip Morris Companies Inc., but that doesn't matter for now. The current dividend yield is a hefty 6.1%, something savings account holders can only dream of. At almost 80 percent, the payout ratio is already relatively high; nevertheless, the Dividend Aristocrat manages to raise its payout by about 9% every year (average over the last 10 years).

Conclusion:
Altria operates in an industry full of opportunity, albeit a risky one. The company is very broadly diversified and has long ceased to depend on just one cigarette brand. Management keeps investing in more future-oriented business areas in order to keep meeting consumers' wishes and to profit from that in the long run. In the end, though, you have to remember once again that high returns always come with higher risk. For investors who want to give their dividend portfolio a little boost, Altria stock is definitely a perfect fit.