Altria (MO) did $25.48 billion in sales over the past year. It did $4.69 per share in profits over that time and, with a share price around $43.30, is trading at less than 10x earnings, explains Nick Hodge, editor Foundational Profits.

Of those $25.48 billion in sales, roughly $9.6 billion is converted into cash flow, some $6.6 billion of which is returned to shareholders via a $3.60 per share annual dividend — equating to an 8.1% annual yield . 

It controls nearly 50% of the cigarette market in the US, largely through the Marlboro brand. It also controls roughly 40% of the smokeless segment via Skoal and Copenhagen. 

Pay no mind to the ethics of investing in tobacco. This letter is committed to individual liberty and responsibility. Also pay no mind to the recent lashing of Juul — Altria’s vaping brand — by the government. The government publicly shames tobacco but revels in the tax it generates behind closed doors. 

While the crackdown in the 1990s did send the share prices of tobacco companies lower, it effectively created an oligopoly that barred new entrants from growing large enough to challenge the incumbents. Sort of like how Democrats and Republicans conspire to keep third parties out, thereby concentrating power, but I digress. 

Without competition, prices have dramatically risen. The $7 per pack I was paying seven years ago is now over $11.50. Yes, people are smoking and chewing less. According to the CDC, “Current smoking has declined from 20.9% (nearly 21 of every 100 adults) in 2005 to 12.5% (nearly 13 of every 100 adults) in 2020.”

But that decline has been more than offset by the aforementioned rising prices, share buybacks, and expense reduction. In the first half of this year, Altria repurchased 21.4 million shares at an average price of $50.53, for a total cost of approximately $1.1 billion. And it plans to buy back an additional $750 million worth throughout the balance of the year. 

A quarter century ago (which was 1997 if you want to feel old), Altria had expenses of roughly $1 billion on its US cigarette operations. Today it requires only $200 million in annual capital expenditures. So it's a highly capital-efficient business that is relatively recession-proof given its well-known status as a “sin stock”. Altria also has holdings in two other related industries:

* It owns 45% of cannabis company Cronos (CRON), which it paid $1.8 billion for in 2018. Like all cannabis names since then, Cronos has lost significant value. That 45% stake is now worth $605 million. But it remains a call option on the industry’s eventual bounceback. 

* It owns 10% of Anheuser-Busch InBev (BUD) after buying shares amid Anheuser’s merger with SABMiller in 2016. That equity stake is currently worth ~$9.3 billion.

And then there’s Juul, the vaping company that Altria bought ~35% of for $12.8 billion in 2018. In 2019, the FDA began investigating Juul for selling candy-flavored vape pods that teens enjoyed.

As a result, Juul stopped marketing in the US and its market share fell significantly — losing ground to Vuse, which is owned by RJ Reynolds and which is still selling vape pods because of regulatory loopholes. In June of this year, the FDA outright banned the sale of Juul’s vaping products, but that decision has since been reversed pending appeal. 

If the decision is overturned, great. Altria will have a new growth market to sell into. If it’s not, kids will continue to steal cigarettes from their relatives instead of sucking down fruit-flavored nicotine vapor — and Altria already has the lion’s share of the traditional cigarette market. 

In the meantime, Altria has written down the value of its once $12.8 billion stake in Juul to $1.6 billion. We have been long on Altria since May of 2020, when shares traded at $36.20 — taking advantage of the COVID dip for our entry. Shares subsequently rose as high as $57.05. 

Subscribe to Foundational Profits here…