Chit Chat Stocks - Brett Schafer | Altria (MO)

Episode Date: December 23, 2020

On the 23rd day of Christmas Brett Schafer gives to you, Altria the worlds largest producer of tobacco products. Altria has moved from just cigarettes to other products as well. Listen in as Brett enlightens us on the potential of Altria. Visit our website: https://www.chitchatmoney.com/ Subscribe to 7 Investing with the code "CCM": https://7investing.com/subscribe/ Follow Chit Chat Money on Twitter: https://twitter.com/chitchatmoney Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to 25 Stocks of Christmas, presented by Chit Chat Money. Today, I have an interview with Brett Schaefer, my co-host. But basically, we needed to fill a spot for the 25 Stocks of Christmas, and so we're going to let Brett pitch. I'll ask the questions. It's a company we're both kind of high on, and it is Altria, which we know is controversial. So we're going to try to kind of dissect that

and give you guys a glimpse into how we think about it. But before we get to our interview, I guess we should say, We have our sales pitch, as always, with our team, our partners, 7investing. Yeah, I'll talk about it. I think they just put out their year-to-date returns. Now, I know one year is not a long time, and it's really only been nine months for them, but they've had quite the hot start. I think they're beating the market by 30% this year, which is very impressive.

And your first month, you can get $10 off with our code CCM, So you can try the service out, check out all the things they have for only seven bucks. Code CCM, you know, you get investor updates, you get, or sorry, not investor updates, subscriber updates, you get subscriber calls, and you get all those recommendations. So it's perfect. And I'm sure you've heard a lot of their analysts on the show now. The last one to come out will be Matt on the 25th, but we're just minus one, Manisha. But you have heard them all. So we assume you like them.

They've done well. Those were good episodes. But now it's time for our show. Here you go. Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investment. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are not financial advisors. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guest is not formal advice or a recommendation. Now, please enjoy this episode. Welcome in. Today, I'm with my esteemed guest, Brett Schaefer. Welcome to the show. Yeah, your highest qualified interview, right?

That's right. We're talking ultra. Yeah, we are talking ultra. We had a few cancellations, which happens with stuff like this. So, you know, I had to step in. Sorry, it's not going to be as good as someone because you hear you hear us every week but yeah i'm excited to talk altria hopefully show that it's not just an investment that's just terrible to make and that if you invest in it you're contributing to death as people like to um associate it with uh but yeah let's get started all right and you know how most of these questions go so how did you or how did we find altria as an investment yeah lawrence who yeah he's been on the show he's a big advocate uh for tobacco stocks and i wouldn't

say necessarily an advocate, but he's really interested in the industry, the unit economics, how it survived for a century plus, at least in the United States. And really, when you look at Altria, it's a popular name for value investors on Twitter. And that is probably where I found it. I don't know the exact place where I started researching it, but that's where I looked it up. And it was probably a year ago and then started doing some real research the last few months. Okay. And the price has come down quite a bit. I think it's trading at like an earnings multiple of something like 10, which we'll get into. But why don't you describe what all Altria does? Because I know a lot of people just associate it with cigarettes, but there's a lot

more to the business model. Yeah. So Altria is a sin business conglomerate. It's kind of a confusing name, but they were renamed from Philip Morris in 2003 when they split Philip Morris and Philip more is international philtmore's international is still a stock that's traded so uh that's basically the same company but they're just separate entities now and then altria has um it has other business lines but it is just the united states tobacco market um well there's competitors to them but yeah the company itself if you go back to its early days was founded in about 1919 um and i guess there's probably smaller stars back before them but that's you know they're the largest seller of tobacco in the United States. They've probably been that for the last

100 years. There could have been someone else at one point. I know there used to be a lot of trust and the American Tobacco Company. But in reality, the last 40-50 years, this has been the name for United States Tobacco. They have a few other business lines though. They have one, Philip Morris USA. That's the largest portion of the business. I think it's 80% to 90% of sales. and that's the cigarettes the ones that everyone knows uh they have john milton company maker of cigars and pipe tobacco they have nat sherman which is super premium cigarettes and cigars um they have a smokeless tobacco segment which actually has i believe 60 operating margin so that one's really um i don't know that one just has fantastic margins that has other things like

the on brand it's like oh and exclamation point no uh those are the patches or not patches excuse me the pouches that aren't like chewing tobacco they're kind of like the vaping version of chewing tobacco where they're trying to make it cleaner you know you've probably seen those before yeah they're like the uh they're big on college campuses so um familiar they're kind of like a zin yeah it's the zin competitor i think zin is kind of the big name um that started this trend and then they're trying to make their own brand. There's a lot of regulation, so it takes a while to get those out into supermarkets and things like that. And then they also own a St. Michelle Wine Estates, small part of the business, not really relevant.

But right now, that business is struggling. And they also lastly have Philip Morris Capital. They own 80% of the Helix Innovations, which is those nicotine pouches, like I was saying. They own 10% of Anheuser-Busch, which I believe is valued at about... Oh gosh, what is it? It's sizable. So, make sure when you're doing your EV calculation to back that out. They have a 35% economic interest in Jewel Labs and a 45% interest, or that's really just a stake in Kronos Group. So, those are the two big outside investments besides Anheuser-Busch.

And who are the big cigarette brands that they own or the tobacco brands in Philip Morris? What is it, Marlboro? Yeah, it's Marlboro. I mean, I can look them up, but they have a few like Marlboro is the number one. it's like 43 percent market share in the united states and they have smaller ones so when you're looking at it all that really matters is is marlboro and then they have the smokeless stuff um which they own like copenhagen stuff like that okay and who's running the company now um just talk about management maybe dig into the proxy a little

bit as well yeah so he okay they've had a turnover um in management so the old ceo was Howard Willard. He had to step down in March because one, he got COVID. And I think that was a way for people to possibly get him out because the Juul acquisition wasn't taken too lightly. He actually didn't get his full performance bonus in 2019 because of this Juul investment. He also invested in Kronos Group right in the height of the cannabis bubble in 2018, i believe or maybe not in the height of it but still when chronos was um at a quite a premium valuation and that has been impaired a ton the jewel acquisition has been impaired a ton i think it's down gosh i think they had to write down eight billion dollars worth of it already so

that was 70 or 80 percent right yeah so the board was not happy with that and in march he i mean they said that he got let go or had to leave because he got coveted in march and he probably did get COVID. They're not lying about that, but that might have been an excuse to get him out of there. William Gifford, who was the CFO, was elected to be the next permanent CEO. Now, if you're thinking about capital allocation, well, wasn't he a part of the old one? Maybe, maybe not. We'll see how he does. He's worked at Altria for 25 years. He is also a director at ABI, which is Anheuser-Busch. So, that's interesting. It'll be interesting to see what happens to that when their lockup period on that investment ends, I believe in October of 2021. So then

they'll have the ability to actually sell their shares in Anheuser-Busch. But there's no indications that they're going to. When he got elected though, so when William Gifford just got elected, they separated the chairman and CEO role, which I think was a good sign. The new chairman as the CEO of Dominion Energy, don't know much about him. But besides that with management, i'm not too concerned because unless they make some more you know jewel type acquisitions that really impair their balance sheet um i don't think this is a business that anyone i mean i don't want to say it's like one of those that warren buffett or all those people say where you know a ham sandwich could run with it or run it you know what i mean i don't think a management can come

in and really like supercharge this business and i don't think anyone can come in and be like yeah we're just going to crush this thing. I don't really know how you'd even do that. Yeah. It'd be hard to kill it other than terrible acquisitions, which has to get approved by the board probably. And obviously they had done that now with the jewel one. But generally, yeah, I think this is a hard business to screw up. Why don't you talk more about the thesis? Why do you like it? Obviously touch on the valuation as well. Maybe how much money they're bringing in a cash flow on an annual basis, that kind of thing? Yeah. So, trailing 12-month sales are actually up 3.4%. You might think that, well, tobacco is in permanent decline and unit sales might be in

permanent decline for Altria, but with a lot of their businesses, they got a lot of pricing power. So, trailing 12-month sales were at $20.3 billion. And these numbers are from about a month ago when I was doing all the research on them. So, if any of these valuation numbers, they might be a tiny bit off i think the stock price was like at 39 when i did this is i think it's at like 42 today so that not that much different but yeah trailing 12 months sales are up 3.4 percent operating cash flow 10.4 billion dollars free cash flow 8.9 billion dollars you can see they really don't have much capex to do a lot of their manufacturing is already set in it's not capital intensive where they have or excuse me the operating expenses are not large

at all they really don't spend that much on operating expenses their gross margin is about 65 so you might think wow that's quite high for something like this you know oh it's just cigarettes how could they make that much margin well when people are i guess addicted to these things and they like to use them a lot there they really have a lot of pricing power another thing i like is that their operating expenditures are actually decreasing by 10% a year, or at least they were over the last 10 or excuse me, 12 months. But I mean, that can't, that can't go forever, but you know, operating margin is strong. They have stated before that they want operating expenses to decrease like 10% a year, right? Yeah. They hope that either they're going to

grow revenues either a little bit or keep them flat and then keep operating expenses either steady or decline a little bit their goal is to slowly decline but you know when they've already been declining operating expenses that that just can't happen forever uh working capital is actually negative 2.4 billion so they're able to turn over their inventory a lot they really like the reliability of the business allows them to have this balance sheet that's not super conservative um because that cash flow is so reliable i think i don't know they've been over $8 billion in free cash flow outside of acquisitions over the last decade. Cash and equivalents at $4.8 billion. Long-term debt is a big concern though at $27.5 billion.

Sorry, I'm giving a lot of numbers. I'll quote that. But their EV to free cash flow is sitting around 11. And I think with the reliability of the revenue and cash flow and the reliability of the dividend, I think the yield now is about 8%, which is quite high. And they're required to pay i think 80 of their earnings per share out as dividends um this investment has a high floor and then you also have to consider that the investments they've made into the smokeless stuff with the helix innovations that's the on brand um the investment in chronos and jewel i know those have been you know written down a lot um a lot of people are discarding those but those are almost call options where when you look at it like okay it's written down already

yeah we're going to generate a lot of cash from the traditional tobacco business but if those take off and they start hurting the market share of marbro excuse me or philip morris i can never say marbro yeah it's it's a tough name but yeah if those take off and start stealing market share if weed becomes legalized federally in the united states they have a way to counteract that if those start stealing market share from tobacco um this is not going to be a 10x investment but but i mean i think the margin of safety is there yeah and it pays out a lot to shareholders it's what 80 of operating income is paid out in the form of i think it's adjusted earnings per share but they can they i mean they convert a bunch of their adjusted earnings per share to free cash

flow so it's almost like they're um paying out 80 of their free cash flow as a dividend okay Touch on the moat too. I know people have been concerned before about regulatory stuff. And I think the regulatory pressure that was added back in 2001 had the exact opposite of effect of what they were hoping to do. Yeah. It's strange. I don't know the ins and outs of all the politics with this, but all I know is they do have a regulatory moat where they got to go through all these, you know, when you're even expanding your business, you're setting up new things, which i think will help them with the jewel acquisition because now jewel's going through all this stuff where the the government's just cracking down on vaping and the only one that's

really going to be able to handle it from a legal perspective is someone like altria or else another startup's gonna have to invest a lot of money but besides that with tobacco one sometimes they the government mandates that and this could be local government this could this could be a federal government thing this could be a state government thing that uh you know cigarette prices have to be a certain price so it forces them to have this pricing power to de-incentivize people for buying them but i mean that just increases their margins and then the government also has the excise taxes that are billions of dollars a year um they like they probably like having those taxes and that hurts uh people that are trying to start up in this business where you're not able to pay these

excise taxes where someone with the scale of altria is able to do that and still generate the um you know, operating margins to make it sustainable. Um, and then there's also local things where you have to, you know, apply to open up. There may be only a few licenses for certain types of products. Um, and that's just the whole thing. Like if we were starting up something in the nicotine or tobacco area, I mean, you need a lot of money on the legal side to actually get going. Yeah. And you think about, well, don't all these regulatory constraints, uh, burden them and hurt them. It's like, yeah, they might a little bit, but it hurts the competitors a lot more, which means they just continue to grab market share

because competitors are forced to give up before Altria does. And the smoking isn't going away. The addiction is still there. The other part was the sales and marketing regulatory problem where they weren't allowed to have advertisements on cigarettes anymore, which prevented all competitors and got rid of the sales and marketing budget, which just increased margins and kept the same customer yes that is another part i did forget about the regulatory moat i mean i mean it's it's weird they'd be like oh you're not allowed to advertise your business well that means that the players that are already in have a huge advantage because they don't need to advertise because they already have the brand awareness think of like in the 90s uh you know

soda had gone through the same thing and they're like no no no one can advertise anymore but coca-cola would have done really well because they're the number one player they're already everyone already knows who Coca-Cola is. Some upstart like, I mean, no one actually has been able to dethrone them anyways, but it would have been a lot harder to dethrone them. And I think that's similar with the Philip Morris brand. Yeah. It feels like all this added pressure from the government has accidentally insulated Altria in a way that they just can't go away. And it's, they have as much as they might try to kill a business, which seems strange because they probably pay so much in taxes um it's they they're basically covered now there's no competitors

that can come in and do it and i guess the only argument and we'll get into this in the back half of the show is that well there might be innovations that uh kill the traditional cigarette smoking business but they bought those call options that if they it happens to them it's life insurance Yeah, it is almost like insurance on their products. Now, Juul, the way they did it wasn't the best. And maybe it was a way to like, I don't know, they were just afraid maybe that Juul is going to take over everything because the growth was astounding. And they obviously did overpay for that with a $38 billion valuation. uh but yeah i mean the the cannabis stuff is also important now is chronos group going to be the chronos group excuse me going to be the winner not necessarily but i think the partnership with altria gives them a huge advantage because now they can set them up on their manufacturing lines and get everything going on that for the industrial scale uh cannabis stuff and they

also are waiting to enter the united states until federal legalization occurs at least that's what Altria's management's been saying. So we're not going to see revenues coming out of that anytime soon. And really, they're not going to realize it because it's not a majority stake. But I mean, that's just a long-term play to kind of give insurance, say cannabis starts growing a lot quicker than people expect. They start taking it up and using that more instead of tobacco. I mean, a 45% stake, I think that covers it at least a little bit.

It's not going to just totally save the business, but it helps. Okay, we're going to hit a quick break. and then I have a bunch of counterpoints for you, and so it's your job to refute them, but here's a quick break. Cox Panoramic Wi-Fi includes advanced security to help protect all your connected devices. You'll get real-time alerts.

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Advanced Security must be enabled in the Panoramic Wi-Fi app. Restrictions apply. Welcome back in. Next up, we have our devil's advocate. So I actually have three counterpoints, and some of them are definitely the ones that people listening are probably thinking about. So the first one is that you are unethical since you want to own shares of Altria. you're an unethical person um so how do you counter that okay the now if you're i'm not telling someone that they need to own shares of altria that is obviously a personal choice uh but

i would re-evaluate whether you're owning shares of altria actually affects them to do their business so for example i'm not going to try to explain this myself uh colin roche who was a very smart investor over at Pragmatic Capitalism is his blog. He says, the secondary market is a bad place to enact change. So when you're talking about ESG investing, you're talking about having funds go to things that hopefully would, quote, reduce their cost of capital if it's a negative on the environment and then, or sorry, increase their cost of capital if it's a negative on the environment and reduce the cost of capital if it's a positive on the environment. yeah if there's a startup i mean maybe that's true but for someone like altria just because

i own shares and that incremental increase to the demand in their stock price is not going to affect their ability to generate cash they already have everything in place um yeah i'm not going to choose to smoke cigarettes on my own uh but that's a personal choice and it's also something that you're investing in that doesn't really affect others it's a personal choice um and i'm not going to go over the moral of smoking or not, but you know, I'd rather do that as a first party instead of as a third party, because I don't think it really affects it that well. However, if you're not comfortable with owning shares, if it's not something that you think you could hold, you know, for 10 plus years, if it doesn't make your stomach feel right. I mean,

there's hundreds, there's thousands of investments out there. So, you know. Yeah. And it's, uh, I mean, it is an ethical dilemma for a lot of investors because everyone's sort of been touched by it personally uh but our stance is essentially we're as investors we're just trying to get value wherever we can find it yeah um we aren't advocating for the product in buying shares uh and whatever you decide to do with the money or the value that you get from that investment then that's where the ethics come into play in our opinion so and then one more thing the management does have a 10-year plan you might roll your eyes at this and say like well whatever happens they're just going to roll with where the demand goes but they have a 10-year

plan to hopefully make their products healthier um don't know if they're like doing one of those carbon neutral things by 2030 but it's kind of like that or they're like all right we have this 10-year horizon to get people off the cancer causing products to hopefully safer ones like those smokeless uh pouches not chewing tobacco but like those you know nicotine pouches vaping cannabis, things like that. Okay. Second counterpoint, revenue in total is only up 13% since 2012. So the business itself isn't really growing despite maybe the dividend and all that stuff. Let's say this business might be in a decline. Yeah. I don't think that's a reason you would want to invest. If you're investing in this company for revenue growth, this is not

what you should be doing. The reason you'd want to invest in Altru is one, you like the payout as a dividend. Again, you don't want it to be a dividend trap, a value trap, whatever. But the operating margin has still stayed strong. The operating income has grown a lot faster. They've still been able to generate tons of free cash flow. And people think like, all right, well, how are you going to recover your investment, say, if let's say the enterprise value, it's hard to tell because of the carrying value of their outside investment sits around $90 billion today, conservatively, if you want to be a little bit high. Like, well, how will you ever recover that? And it's like, well, they generate about $9 to $10 billion in

free cash for a year. So in a decade, my investment will be fully recovered and 80% of that will be paid out to me as a dividend. If you're a growth style investor, if you like to invest in something that you hopefully can 10 bag over the next decade, and that's your goal, this is really not for you. But the margin of safety with something like this is so high with those outside call options that can maybe, you don't need to like bank on those generating any growth. But with the pricing power in cigarettes, with the fact that the decline is not that... It's a little overstated. I mean, they had one year, I think over in 2018, possibly. It could have been 2019 where volumes were down 6%. I think it's only down 2% this year. And in reality,

what matters is the bottom line. So far this year, it may have been the last quarter, it could have been the trailing nine months, the first nine months of 2020. I believe operating income is up 5%, which might surprise some people. Yeah. And you touched on an important point there, which was the margin of safety. And I know some people roll their eyes and they're like, who cares about margin of safety? We want businesses that are going to be 100 times bigger in 10 years. If there were a bunch of screaming buys in the market right now, we might not be looking at Altria, but there's a lot of excessive valuations that make it hard to buy a lot of companies um but so this feels like one of the best options that's currently out there yeah i

mean would i rather own um square square yeah square is seven times or six times sales or roku at four times sales which they were training at not too long ago yeah i mean those were ideas we were comfortable with that we thought there was some margin of safety there if you price in some of the growth but when some of these names get up to a sales ratio of 20 i mean maybe i mean Altria might be the place you want to look because it's, it's the, it's not just the probability of high returns. It's what is the probability of a loss? You know, if the probability of loss of your investment goes up, you got to really hope that, you know, the reward's a lot higher, higher risk, high reward. I think there is very low risk investing in Altria. It's one of those

businesses that seems permanent. You know, people have been smoking tobacco at least in the, you a Western world, since the discovery of the new world in like 1600s, I don't know if that is going away. And also if that transitions to more, you know, chemically produced nicotine things that also will not be going away. And Altria has a lot of growth in that as well. Yeah. I know some people maybe think that we're calling ourselves value investors here by skewing towards a little bit of risk aversion, but it's when, when everyone is increasingly risk tolerant and they're all screaming that they have a 20-year time horizon like everyone's like well if you waited on microsoft for 15 years if you would have stomached flat returns for 15 years well or like a 30 drawdown

minimum yeah which it sounds great in theory but it's super hard in practice it's really hard to compound from a 50 drawdown or even 60 and so i mean the floor is really low on a lot of software businesses right now so i just uh this this is our skew towards risk aversion yeah and i know myself i don't think i would have been able to hold microsoft okay let's say i love to tell myself that i could yeah i don't think i would have if let's say i invested in microsoft in 1995 it did phenomenally well and i was like all right i i guess i can just hold this thing for a long time i have that drawdown i'm still doing well post the 1999 big drawdown but if i invested in 98 99 i i don't think i would have been able to hold shares and i hope i mean maybe if i would

of things could have gotten better but i i don't want to take that risk because i don't know if i could have and that's kind of a risk i see with things like um you know those high press priced sass names and i think i'm more comfortable and i think i could own shares of altria for 10 years even if you know things happen with the share price yeah and and people are like well no you know i do have the stomach for it i can tolerate it and we saw it how old are you how old are you We saw it with Fastly, which had like a 60% drawdown in a month, and everyone's like, yeah, maybe I was wrong about Fastly. It's like nothing changes sentiment like price, and we're starting to see that in a big way. And so, I don't know.

I guess this is our safe bet, if you will. Yeah, one more, right? My third counterpoint is the Juul acquisition. I think it was – well, some people say it was stupid. It may have been. And it also forced Altria to take on a lot of debt to finance that investment. Yeah. So, yeah, that definitely was the big reason why the share price has cratered the last few years.

Their total debt now, long-term debt is at $27.5 billion. Net debt is about $23 billion. But, yeah, I think they added, gosh, what was it? That long-term debt is long. It's pretty long. It's pretty long, yeah. I mean, a lot of it, they're not paying more than about $1 to $2 billion a year. And the interest rates on these loans, a lot of them, they've actually, a bull case really for them is that they were able to refinance a lot of their loans on their bonds.

They paid back some of their bonds and got some new ones at some really attractive interest rates. And a lot, some of these are like, it's like a 20, I don't want to put words in their mouth, but it's like a 20, 30 loan. And the interest rate was like 3 or 2.7%. I was like, yeah, take that. It's almost free money. But they did have to add about $11 billion in more debt to finance the Juul acquisition. And the valuation was $38 billion, and they gave Juul $12.8 billion. Right now, the fair value of that is down to $4 billion, about $4 billion.

And actually, that may be old. I think they may have done another write-down. So really, that asset is totally impaired. there's been all the you know political and consumer uprising against jewel um and vaping because of how you know it was viral on like college campuses and in high schools um and you know we'll see what happens there but yeah i believe that's priced into the stock now and again they have this extra debt but look at the cash flow they generate is that cash flow going to stay around for the next decade if so i i'm pretty confident they'll be able to one pay down

that debt or you know they're not going to be in any trouble of going bankrupt and two i mean they're still going to generate value i mean yeah i mean it's hard to say you know what i mean like yeah it made the enterprise value balloon a little bit uh but it's not a total concern and there is that take of this essentially being life insurance they made this investment before there was the political lash back uh before there was any crackdown on it um so at the time it was looking like everyone's gonna stop smoking cigarettes everyone's gonna move to these uh e-cigarettes jewel vaping type stuff and so they essentially said if that's true we're gonna buy it so that if we die as in the cigarette business at least we're alive through

that which if and if it gets marked down and the jewel business dies great that's good for the other business it's fine it was just a 12 billion dollar killing killing in the crib which is a bit expensive but it's something a company like altria can stomach another thing with jewel though is again the regulation things if vaping becomes highly uh sorry regular no regulated regulated excuse me uh brain fart there if it becomes highly regulated these upstarts these companies that where you just buy these cheap ones uh from whatever just amazon or these weird sites which i know a lot of people that do vape that's where they get them um if that stuff gets starts cracked down gets cracked down excuse me i mean jewel's gonna have a giant advantage with all trees legal

team where they might be the only ones that can actually survive and actually do things the right way just as other you know players that regulatory mode might actually get enacted you know within the vaping space as well yeah i agree um all right last oh i guess second to last question And what would make you sell Altria? And this is an important one. Yeah. Because it's obviously not the perfect business that we want to own if there were more attractive options. Yeah, I guess.

Okay, I have five potential risks that I wrote down when we were doing our research here. One is a loss. Their loss in market share accelerates. They had a small tick down in market share with Marlboro. Sorry, I apologize. Again, I cannot say that. But if that continues, I mean, that's a concern. If there's heavy bans on smoking in general in certain areas, I don't think that's a huge concern, but that's something you always have to watch out for with a politically charged company like this.

If weed gets legalized and cannabis use soars, it starts stealing market share from tobacco, and then Kronos does not do well, I think that is a small risk. If Juul gets outright banned, that's another, I mean, we said it's not a terrible risk, but that's what another risk that, I mean, what, a $4 billion in asset write-down, which wouldn't kill them, but still is a small risk. And then I think the big one is that the decline in domestic cigarette use. When I say domestic, I mean the United States. If that accelerates, that is a huge risk. Right now, over the long term, I think it's been about 2% to 3% a year.

Could be getting that number wrong, but I think it's around there. if that accelerates to like five percent a year um they could be in trouble um a little bit of trouble that might tighten up uh some things around there but i mean you just got to watch out for that i mean i am not a nostradamus i cannot predict the future but i think that people will still be smoking cigarettes in uh 2030 just like they were in you know 2020 1920 1820 yeah what and what about price oh yeah i guess i mean yeah if the valuation totally soars because a lot of this is a uh you know um it's it's on some of it's the dividend you know yeah where they have to pay that out as dividend um i think if the price doubles yeah i mean that matters that

matters to me so okay um i guess last question what's one change that you'd want to make which we've sort of talked a little bit about the changes already but uh is there any one big one the change would mainly be capital allocation i don't know how realistic this is uh but i do not like and this is this is obvious for anyone listening but i do not like how 80 percent of their adjusted earnings per share gets paid out as a dividend um i would hope an activist goes in and changes that to like say all right you know let's pay out 30 to 40 percent the rest can be buybacks right i i mean and then this one is totally fantasy but if they cut their dividend entirely stock craters and then they start buying back shares that's i like i mean dividends and

buybacks aren't that different if they're not taxed um if they're taxed equally but right now buybacks aren't taxed at all dividends you have that uh the tax on it when you get paid with it and that just hurts the you know the actual capital that gets returned to the shareholder so i would way rather have them do buybacks um but on the business side there's not much to change it's the same business as it really ever was if they buy back shares they have less to pay out in dividends yeah that is a weird um i don't know it's a weird like catch-22 scenario if they reduce their share count it actually might mean they pay out less um in dividends um they kind of i don't know how much of that i don't know how dangerous that was get that would get if they

start doing that too much. But yeah, I mean, I don't know. I don't like how they pay 80% out of dividends. I would like them to change that to a more efficient capital return strategy. Okay. I think that's going to do it then. I guess I don't need to give your point of contact. Yeah. Just subscribe to us, 7investing. Hopefully this didn't ruin all the great interviews we had. I mean, listen to all the other ones. They are a lot smarter than me. And there's a lot of other cooler stocks, to be honest, than Altria. Yeah, definitely. We want to remind our listeners that we are not financial advisors. Anything we say or discuss here on Chit Chat Money is not formal advice or recommendation. Thank you guys for listening to us. We'll see you

next time. You