Chit Chat Stocks - Is Brett Buying Altria Group Stock? (Ticker: MO)

Episode Date: December 5, 2023

Altria Group, Inc. (MO) is a major tobacco and cigarette company with a diverse portfolio, grappling with challenges stemming from declining smoking rates, increased regulatory scrutiny, and its efforts to pivot toward reduced-risk products. Listen as Brett gives a pitch on the company and Ryan provides feedback and critiques. Enjoy the show! ****************************** Chit Chat Money is presented by Interactive Brokers. Switch to the best brokerage in investing today: ⁠⁠⁠⁠⁠⁠ibkr.com/info⁠⁠⁠⁠⁠⁠ ***************************** Subscribe to our Substack to receive free show notes and charts that go along with every episode: ⁠⁠⁠⁠⁠⁠https://chitchatmoney.substack.com/⁠⁠⁠⁠⁠⁠ Want updates on future shows and projects? Follow us on Twitter: ⁠⁠⁠⁠⁠⁠https://twitter.com/chitchatmoney⁠⁠⁠⁠⁠⁠ Contact us: ⁠⁠⁠⁠⁠⁠[e-mail]⁠⁠⁠⁠⁠⁠ Timestamps Company Background | (3:43) Stock Analysis | (16:27) Competitive Advantages | (26:27) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Learn more about your ad choices. Visit megaphone.fm/adchoices

When WestJet first took flight in 1996, the vibes were a bit different. People thought denim on denim was peak fashion, inline skates were everywhere, and two out of three women rocked the Rachel. While those things stayed in the 90s, one thing that hasn't is that fuzzy feeling you get when WestJet welcomes you on board. Here's to WestJetting since 96. Travel back in time with us and actually travel with us at westjet.com slash 30 years. welcome to chit chat money on this show host ryan henderson and brett schaefer interview

industry experts and riff on the world of investing as a quick reminder chit chat money is a ccm media group podcast anything discussed on chit chat money by ryan brett or any other podcast guest is not formal advice or recommendation now please enjoy this episode welcome in this is the tuesday episode on chit chat money notice how i said uh or i didn't say not so deep dive episode which is what our typical episodes are i do not know what the title is for this one yet we're mixing things up for anyone that doesn't know we shut down our investment fund ryan and i ryan i should say is on the call with me here too we should call it and our like our portfolio because it's like it's us now you know i like that i don't like arch capital but

it's like what we're doing with our own stocks or our own yeah personal updates something like that i think we can do that i don't know about that for the title but definitely yeah for the show ryan did uh tease it there we are going to be talking about stuff that we are thinking about buying have researched maybe and the format of these shows is going to be a little bit different i think it's going to be quite fun where one person is going to try to do a research for a pitch give some good data kind of give a company overview and then the other person is going to be a springboard to try to play a little devil's advocate come up with some feedback all the good stuff and today i'm doing a pitch and it is on altria group a sin stock conglomerate i'm going to go through it

hopefully it can be insightful for any listeners i should disclose i do not own shares today but we'll get into whether i'm looking to buy some i could easily change yeah we have all those disclosures can't change today because the market's closed but it could change in a future date yeah so anything else you want to tell the listeners ryan about this format am i missing anything before we get into the company overview no to be honest i didn't have to do a whole lot of work for this episode so brett and i just are we're going to be alternating basically either pitches whether it's to buy something sell something some sort of change that's going on our personal portfolios now. And so because Brett's basically pitching Altria, we're going

to go through the business and we'll get to his conclusion in a little bit. I'm going to basically be asking questions and I'm going to let Brett kind of be, it's almost like we're doing a deep dive episode or an interview where you're the guest. Is that fair? Yeah, somewhat, but I think a little bit more interactive. The interviews are more us just asking a question and letting them talk for five minutes. That's how we like to roll. But I will say, do you have some good charts in this episode? So subscribe to the newsletter for free. That link will be in the show notes wherever you're listening. And if you enjoy these shows, the best way to support is just five star on either Apple podcast or Spotify. And then lastly,

as we try to, we're still figuring out the format here, but since in our personal accounts, we only own about 10 stocks each. These are not going to be companies that we're always just super excited to own. It's almost like, and I know this is going to happen a lot of the times, we're interested in this company, but either there's one little flaw or a couple little flaws that we're looking to get answered, or the price is probably too high. So we're going to discuss that today with Altria Group. Let me get right into it. They are a sin stock conglomerate focused on the tobacco and nicotine space. They have a long history,

which we'll go into into the next section for anything that's relevant for the investment today. And Altria has really no meaning. It's just a consultant word. I got to say, quite a good one. We just covered Diageo last week. I think that's another just made up term. And Altria is quite good

because no one actually knows what they do. But I should say their largest segment, people are going to know, and it is philip morris usa and it is dominated by the marlboro brand uh they sell cigarettes only in the united states and we'll get into the history of why that is because they split up from their international group and then in uh within their smokable segment which i should say is their largest one they have the black and mild cigar brand which some people might know of so they have it's a smaller part of smokables but still you know could have some impact on the

business. It's a solid, solid size one, but the most important part of this business by far is Philip Morris USA. And within Philip Morris USA, it is the Marlboro brand. Now they have three other segments that I decided to kind of throw out here that I think are important for context. The second one is oral tobacco. Now this includes three important brands, one Copenhagen, two Skull and three, the On. I don't know if you're supposed to yell because it has the exclamation point, the On, nicotine-bad brand.

But it's kind of a bad name, if I'm being honest. It's bad, yeah. It's hard to write about. It's got an exclamation mark, but it's not the end of the sentence. Oh, yeah. The autocorrect things just do not like that. And I got to say, we will talk later

about how I'm a little nervous about this brand, although it has done fairly well. So there's those big three for anyone that's in the kind of uses any oral tobacco products. You will know that Copenhagen and Skoll dominate the market. Altria has historically dominated the oral tobacco market in the United States with over 50% market share. However, this is important note for the listeners and investors in recent years that has fallen due to the proliferation of the new Zinn nicotine pouch brand, which is now owned by Altria's

past subsidiary, Philip Morris International. Altria's market share is down to 44% for this category, and it's been ticking downwards for the last five years. Third segment I will call vaping, which is maybe like a smoking-esque or anything within that category. You could talk about their heat not burn stuff too here. They spent around $3 billion acquiring NJOY,

which is N-J-O-Y. That is a vaping product. It's their new foray here. they had previously purchased a 12.8 billion dollar stake in jewel uh that has now been written down to zero uh with uh it was a big mistake we should we'll talk about that maybe in a little bit ryan maybe i can as i try to take a breath here add you in here the vaping category i kind of have an assumption of writing it to zero and honestly having negative value for this business because of their blunders what are your i mean it was jewel it's one of the worst

investments this century, right? By far, given the size. Yeah, I think, well, it's really easy to say that now, but I do want to say, if you were Altria's management team three years ago and you were witnessing the rise of Juul, because it was really the only popular vape nicotine product and it went viral yeah it had an insane market share in the uh the non-dis like the not the disposables but the like ones where you refill i mean it had like almost 100 market share so it i could see where it was coming from but when you make an investment of that size i think you have to be very cognizant of the political risks the risks of competition coming down the pipe and do your due diligence and check that they're advertising targeted stuff to people

under the age of 18 that's not going to fly in any sort of court with any sort of political administration uh in there like if they did their due diligence they would have seen that the company was acting badly but this is not a post-mortem about jewel anything else to add there right Well, I think we're going to talk about maybe some of their capital allocation issues over the last couple of, well, last decade. Here's my thing, and I just want to get to it now. The capital allocation has been bad, but if you're the executives at Altria, you're looking at your smokables and you're thinking, even though we could drive pricing power, maybe we can juice more out of this. we need to find some sort of a new long-term business that has a growth category. And unfortunately for them, most of their choices or most of their ventures have flopped

in kind of a big way. And it wasn't like they bet small and let it grow. I mean, the jewel, they went like shoulder deep into a very bad investment. So it's, I mean, yeah, bad capital allocation, but I understand where they, I understand the thought process on getting behind some of these brands. Yeah. And I'll get into the history. The on one, two was good. Yeah.

So far they're kind of, I wouldn't say losing, but you know, Zen is just much, much bigger. And as we get to the fourth category, so the first one, smokables, think cigarettes, and then black and mild cigars. Second, oral tobacco. Think Copenhagen Skoll and the On Nicotine Pouches. And smokables, I should say, is about, I think, 90% still of revenue and higher part of operating income. So the key for profits is smokables. But the fourth part I have here is investments. And there's two, but one that matters. So they have a large stake in Kronos Group, which is a Canadian cannabis producer. Don't really care about that. Second one, they own 10% of Anheuser-Busch. If we add these two stakes together, which the majority is Anheuser-Busch, actually,

let me get an update here because I have a live tracker. The investments are worth about, yeah, $12.5 billion still. So the Anheuser-Busch stake is large. And if we look at their market cap, it's approximately $75 billion. And then if we add in their long-term debt of $25 billion and they have minimal cash, their enterprise value comes out to around $85 billion. So a large portion is this Anheuser-Busch stake. Now, they can't do anything about it.

Anheuser-Busch pays a little bit of a dividend to them. But it'll be interesting to see what they do. And we can kind of theorize. Maybe we can talk about it now. Should they sell this stake? Or what are your thoughts here, Ryan? Because I kind of go back and forth. The answer would probably be no. And so maybe I would have said, yes, like two years ago, whatever, kind of just give the money back to shareholders. But now that we've seen some consistent years of steeper volume declines than the whole last decade prior, I'm starting to get worried more so that they need to find something that isn't in terminal decline.

and at least not increasingly interminable decline. So like the deceleration is, or sorry, the decline is accelerating. Alcohol is one area where it's pretty resilient. Now beer has lost some market share to spirits over the last decade, but still it's growing on a total sales basis. So I don't know, hold onto it would be my choice. At least it gives you something that is growing. in the portfolio it's technically probably the biggest thing that's the biggest yeah it's got

to be the only the largest like growth driver for them even though it's like a minority investment technically alcohol would be the biggest growth driver for them yeah and black and mild the cigars is i think has been growing i actually should have looked at that but it's been fairly stable so that's a highlight here for kind of the smokable segments i don't have that data in front of me. So maybe some would argue that, but again, that's a pretty small portion of the business as well. I think, okay, two things, I think one, and I kind of agree with this a little bit, but I also see where Ryan's right is any tobacco investor would say, well, the business has been in terminal decline for 50 years, but volume declines have, the rate has changed over

last few years and i think you know the big question is is is this an anomaly or the new normal here then second one thing i'm worried about is one the the prevalence of beer drinking going down and the new weight loss pills uh there's a lot of data out there about how it stops people from drinking heavily and can help people cure their alcoholism and really the anhyzer bush's core customers are people that drink a lot of beer right and if those go away i mean that's that's pretty you know bad but what can all trade do here maybe if their stock gets cheap enough they sell it to buy back right that would make sense but it's a fine line between cheap can they just start selling stock in the open market okay i believe that uh yeah the

contractor or whatever the term has passed but i honestly i should have looked at that i should confirm that but yeah i believe they can now see here's my problem and if you're like if you're listening to this podcast from the point of view of you're a tobacco investor and you've been you're maybe hoping to get some confirmation bias out of the show potentially i you know we've been there we've been invested in the tobacco space there's a lot of competitive advantages but right now for altria they've basically got like if they lit if they sell their stake in anheuser-busch to buy back stock they're selling a declining business to buy back not now revenue growth actually has gotten to the point where it's negative but the it's like

you're buying a decliner to buy an even worse decliner in terms of volumes terms, they got to find a different pillar here. My other part here is I think even the staunchest supporters of Altria as an investment would say that at the current volume declines, the math breaks where they can't really keep up the earnings growth if they're getting those 8% potentially volume declines or greater. Well, I might have my number seven and a half percent, but I think that kind of blinded that with the black and white. I don't know. I don't know. It might work. Your revenues are declining now, right?

Oh, well, I'm saying the earnings can grow because margins are going to keep going higher, but that's for another section. Pit Shop Money is brought to you by Interactive Brokers. Designed for active traders and sophisticated investors, Interactive Brokers offers trading assets in 150 markets with 27 in different currencies. Interactive Brokers also charges USD margin loan rates from 5.83% to 6.83%. They've also got the ability to trade stocks, bonds, futures, options, commodities, and more, all from a single unified platform. Brett and I use Interactive Brokers ourselves, and I honestly have to say that if you spend a considerable amount of time managing your

investments, if you're spanning the globe looking for new stocks, I highly recommend using Interactive Brokers as your platform of choice. Restrictions apply, but for more information, visit ibkr.com, member SIPC. Open an account with IBKR today. Let's, as we get this intro section out of the way, I want to go through kind of the five things I'm thinking about for sort of whether I'd buy Altria,

you know, what I'm looking at for this pitch is one, one, what will smokable revenue look like five years from now? What will the trajectory be over the next five years? Two, what will oral tobacco revenue look like five years from now? This is much less relevant, but still important. Generates about $1.6 billion in earnings for them. Three, will management be smart capital allocators or maybe also what are they going to do here? And then four, assign no value to anything else. So no value to vaping, nothing excluding basically chronos group all that stuff so i'm just strictly strictly talking oral tobacco and i'll cut you off there because

well i want to butt in so you don't have to monologue the whole show but is it okay to assign no value well it's not negative on my side or is that optimistic well i'll go through the math and i uh put in a billion dollar handicap each year for management blunders over the next five that's kind of still might be optimistic yeah it could be if the if the the people that are buying jewel are still there but yeah you know if that mistake happens again well there's a lot of value that's going to be destroyed and that's all talking about it wasn't even probably more value than 12.8 billion that got destroyed because they got laden with debt and the last one is basically going through some math

And after all this stuff, I'm trying to be conservative, still the volume declines, going through all the math, saying what capacity will I have to pay the dividend and repurchase stock? So trying to do some math there, because that with the yield at about 9.5%, or I think the stock's been up a little bit this week, so maybe closer to 9%. I mean, that's a big deal. It's the most important part of the thesis here. So let's move on to the history. We could do a whole podcast on the history of Altria Group. That's for another show. but we're going to look at what are the important things for how the business got to where it is

today. So Philip Morris is a longstanding cigarette brand or company. It started out over 100 years ago and has been running with this Marlboro brand for a long time. Any older listeners will know about the Marlboro Man, the Cowboy, all that good stuff when they could still advertise. And if we look at specifically what they've done from a business perspective, acquisitions and divestiture. And the divestitures or is divest, I can never say that one correctly. In 2008, they spun off Philip Morris International, which is now under the ticker PM and focused specifically on the United States market. So it's all in the United States here. In 2007, they acquired John Middleton, which is the cigars business. And then in 2016,

Anheuser-Busch merged with Saab Miller. Altrio Group maintained a 10% stake in this combined conglomerate since then. So Anheuser-Busch, they've had a relationship with this company or parts of it for a long time. But under the current form, it's been since 2016. But then starting in about 2017, 2018, they went through, I think it was probably the panic from the vaping growth, right? because that's when it was really taking off, they started making these investments. So in 2018, they take the sizable stake in Jewel Labs.

2019, they take an 80% stake in Helix Innovations, which is the nicotine pouch stuff, the tobacco-free nicotine pouch stuff, I should say, and then eventually bought the whole business. And then also in 2019, they took a large stake in Kronos Group. In 2021, they sold their wine business, st michelle st michelle estates for about 1.2 billion i believe in 2022 fun fact brett used

to work there yep not too far from our houses not too far they had a good concert series i used to work at uh 2022 they announced a joint venture with japan tobacco to commercialize a tobacco heat stick product which is another reduced risk product tbd what's going to come up with this we don't know also in 2022 the company gave back the rights of the heat not burn icos product spelled iqos back to philip morris international for over two billion dollars so philip morris international could sell the product in the united states the change begins in 2024 so we'll see what the impact on the market is there and what phil morris international is going to do and then in Earlier in 2023, they completed the acquisition of Enjoy, the new vaping venture.

So a lot of stuff has been moving around. I hope is not an investment thesis, but I would hope over the next five years, we see a lot less of this chaos, Ryan. But I don't know if that's something that should be discounted, right? I think that's why I have the management handicap there. yeah i don't mind the small stuff i really don't in fact i'd probably encourage it like if you're gonna buy small uh whether it's vaping or oral tobacco or um just sort of modern nicotine businesses i think i'm okay with that because obviously Altria has the distribution. They've got the relationships with distributors and retailers

that they can scale these concepts pretty quickly. So I'm fine with them paying up for the small ones. Yes, I would be seriously concerned if we started to see big plunges like what you saw with Juul and Enjoy. Frankly, we don't know what's happened there, but it's a big investment, right it's not small yeah if you're handicapping 1 billion if the enjoy goes to zero potentially the handicap wasn't enough if yeah on 1 billion right yeah i'm doing 1 billion each year so 5 billion total but they could do something else interesting point is what if they bought so we just match for 16 billion now that would have actually worked out and it's not a show about Philip Morris International.

It's not a show about Philip Morris International, but what's interesting is that the total return for Altru Group has been higher than Philip Morris International, I think, over the last 10 years, despite the narrative, which I think is quite interesting. So, Philip Morris International has made a lot of, you know, they talk a big narrative, they talk a lot of stuff about the new age products, but if you look at their profitability,

yeah, you know, some of it's foreign exchange, but Altru Group has done quite well. But if you want to look at the history of the tobacco industry, there are really just a few important things to know first it's the key one the usage rate of cigarettes in the united states has steadily declined over the past half century however in recent years usage of the quote new age risk reduced products such as vaping and nicotine pouches have been rising in popularity by a ton so the volume of cigarettes has been declining at an accelerating rate, but nicotine usage has stabilized. Second, in 1998, what is called the

Master Settlement Agreement, MSA, was signed by the four big tobacco companies, including Altria Group. This was a signed agreement that would pay the government and other stakeholders based on the harm tobacco products had on society. I have a quote for the newsletter. I'm not going to read it all, but there was our friend Lawrence Hansel from Twitter of Fortune Financial Advisors did a written interview with the author gene hoots who covers the tobacco space i think he worked in the tobacco industry for a long time he basically said there were all these stakeholders here that really you know the tobacco companies and the harm that cigarettes had and how they tried to underplay that they had a lot at stake and you know there's the fda government's attorneys

tobacco farmers blah blah blah over a 50-year period this msa could reach 1.7 trillion dollars in payments i mean he basically said like the a staggering sum like this would kill almost any industry but when it happened in 1998 it's not so for tobacco because you know with a shrug as he puts it they were able to cover all these added costs by raising cigarette prices by only 45 cents pack even allowing them to increase their profits slightly and then he goes further and says uh they also benefit because the potential for lawsuits are gone now they've had you know everyone's aware that cigarettes are bad for you and now that they paid this gigantic sum they have quote-unquote pay their debts i guess to society and then he follows it up here that

philip morris had the best advantage because all cigarette promotion ceased at the time and they They had the largest market share with Marlboro. So almost since the master settlement agreement and since the freezing of advertising market shares within cigarettes have been remarkably stable because it's really hard. I mean, who's making a new cigarette so that they have the best advantage. And that kind of leads into that is funny.

It's funny. The competitive advantage section, but yeah, you have a followup. It's kind of a funny thought experiment. Like if you were a competitor, how would you gain market share if you couldn't advertise what's your strategy yeah no idea and and your pack like there you cannot have anything on your uh actual product

that's like an advertisement if you get what i mean you have to put the warning label that basically says this causes cancer yeah that'd be pretty rough let's go through some of the competitive advantages? Why don't you just hit on all the, I guess, positives about the cigarette business, and then we can go from there in terms of maybe the investment case. Yeah. So cigarette business, for anyone in the falls of space, this is well-known, but if you're kind of new to this, I think this is quite a good lesson on the counter-attiveness of the industry. So I think nicotine businesses generally have competitive advantages. This is not just kind of the smokable cigarettes.

First, nicotine is addictive. You know, it keeps consumers coming back and buying more. Second, it's not a gigantic purchase. It's a habitual purchase. So you're going to be coming back and you're going to, even if it's not addictive, you're going to have that reinforcement with a specific form or a specific brand, right?

That's why Marlboro, with their Marlboro Man advertisement, they did so well, kind of, you know, half a century ago, and then that got frozen. They've been able to maintain that because everyone has the consistent feel. It's a recurring thing. It's just a habit.

And you also have the specific taste and feel of a certain product that another company is going to have an extremely hard time replicating. The biggest example here would be Coca-Cola. And that leads to massive brand loyalty within your category. For my seat in the nicotine space, Marlboro has the best brand.

It clearly does because of the market share, I would think. And over the decades, it built up fine share with consumers, with the Marlboro Man advertisement, stuff like that, everything they did. They didn't have that ranch down in Montana that I think they're selling now, which is probably good. I don't think you can underestimate the constant reinforcement

of a quality product to, well, say frankly, an addicted customer base. Now, from a personal perspective, yes, back in the day, the cigarette companies were shady, but we're looking at them as an investment from today. I'm trying to, for any listeners, I know some people get upset about this, but that's how we're looking at it we're not talking morals we're talking investing okay then government regulation further widened the moat for mall bro and these other ones because as we talked about you're banned from advertising so this froze the market and there's been minimal

market share changes within the last 30 to 40 years because okay who the hell is trying to build a cigarette brand these days how would you even do it if you if you came up with a new product and the business is in terminal decline so okay it's going to go away eventually why would we even why do we even do this um i think it shows up in the pricing power i'll have a chart but actually i'll share it after ryan any other thoughts about the competitive advantages here no it's certainly a it's certainly an advantaged business and you can see why margins have been able to get so high for the winning cigarette brands. I think Marlboro, I don't know if you gave the number, but my guess here is that they're

probably at around 60% operating margins. And a lot of that is the fact that people can't compete with you. And so there's typically in an industry where if you're earning tons of really, really attractive returns on whatever your business is, people will come after it because it's really attractive and you just simply can't hear. And so that allows you to really push the price per pack considerably and ultimately margins. Brett is showing a chart here of Marlboro's price per pack each year.

It's increase per year. Each year. Yeah, yeah. It's increased per year. So yeah, they give the data on this. They hide this in the annual reports because they probably don't want to show the world and just in a presentation, hey, we keep raising prices by this much. So a bunch of stuff gets written in the news.

So for context here, and for any listeners, I can just explain it easily. The average price of a pack of Marlboros is about eight bucks today. Or actually, I should say, when I looked online, it's the average price for a pack of cigarettes is about eight dollars. Marlboro, I guess, might be a little bit higher. I'm kind of thinking what I've seen in the state of Washington where we live. Maybe it's about nine, ten bucks. Either way, about, you know, decent reference here.

and that's for today but if we go back for the last 10 years ish this is 10 maybe 9 you know in 2014 they started raising prices about about 15 cents 2015 about 15 cents a year but then when we started getting in 2019 they're at about 25 cents for the price brace for that year but then they started accelerating this through 2023 now we'll maybe talk about reasons why they did this because it might be a bit more defensive than on playing offense but in 2023 so far they've raised prices by over $0.60, and their market share within cigarettes, and I think they consider it the premium segment, has been fairly stable over the last few decades, which I think is a good testament to why this is such a unique industry and why it is impossible

to compete within cigarettes. This is interesting. Do you think, because it's kind of like a chicken or the egg problem, do you think management's Marlboro's management team is reacting to volume declines by increasing the price by more and more each year, or are the volume declines a by-product of the price increases and maybe it's both. Oh yeah. I got that for the next section. So, or another section. So I said, we tabled that maybe listeners can think about that as well. Uh, yeah. So let's go to the next one, tobacco volume declines in the United States. I think in order to value the stock,

you really need to look at tobacco volume declines and make a bet prediction, however you want to talk about it, about the rate of volume declines, what they will be in the future. I think we can get some context here by looking at year over year Marlboro volume declines. And this is kind of just unit volume. So it has nothing to do with price. It's just the units getting sold, I believe, to distributors, retailers, wherever. Try to share the chart here. But the key is the things have changed over the last couple of years so let me try to just zoom in here i'll describe it for the listeners if we're i have a chart going back from 2008 so about post gfc if we look at 2009 uh which is kind of you know bottom of the recession yeah for premium cigarettes

i think a lot of people traded down they didn't do too well but which we kind of got out of that and we kind of got out of the post gfc stuff and the economy started to grow again we started to about four percent give or take maybe some years kind of grew so maybe average it out to about three and a half i actually didn't do it here but three and a half four percent but and if you exclude the pandemic year we're in 2020 um unit volumes actually grew which kind of shows how stressed out people were that year starting in about 2017 which is when the nicotine pouches the tobacco-free nicotine pouches and vaping really took hold across the united states we've seen an acceleration in the rate of volume declines going from about five percent uh to

around eight percent to 2022 and the last or excuse me first nine months of 2023 are well over eight percent i believe the last quarter was ten percent so stuff's moving in the wrong direction and that's probably why the stock's down when you saw this chart ryan because i know you got to look at the notes before we recorded what were your thoughts here just kind of you you know, your, your narrative in your head and meet kind of what the data was showing. Cause I think it's, we've talked about this before. It's a, it's something to be concerned about. Yeah. I think I would be, this is the only thing probably keeping me at Altria is the fact that we've gone from 3% roughly annual volume declines to almost six, really 8% in the last

couple of years, even more so, it's hard to see how that's sustainable. It's obviously, and you could say, well, oh, they can raise prices. It's like, well, then the concern becomes if you're losing volume to 8% a year and you have to then raise prices by 9% or whatever to offset it, you're gouging that many more people out of your product, even though it's addictive when there's more and more alternatives. gives so yeah I think this is very concerning I don't think it's sustainable what there I I think I saw this tweet at one point like what the year's 2050 and there's one smoker left in a 25 billion dollar pack of cigarettes I just don't see how that's I don't see where you go from here yeah

it feels like at some point they're gonna have to kind of temper or taper the vault the price increases i don't know if that'll be enough what would you do if your management would you just keep raising prices into oblivion like yeah i think they can i mean okay i'll just go through what my notes are what kind of my uh let me just make sure the right spot here what i'm estimating is a seven and a half percent for smokables now black and mild kind of helps even that out some marlboro will be a little bit worse than that most likely um i think you know some people might out there might argue that yeah this is just going to normalize because we're seeing a normalization from covid and it's a bit of a bullwhip they're seeing a bit of a headwind here but i don't think

you're being honest with yourself if you're saying that vaping and nicotine pouches have a huge impact on this and it's a big the key reason why it's declining at an ever-increasing rate I don't think betting on getting back to 4% volume declines is really that smart. But I will say, Ryan, you're concerned about the decrease. Now, I have a chart that I'll include in the newsletter of Marlboro volumes going back to 2008. 2008, we're about 141.5, that's billion, I don't know, some sort of unit. Let's just say 141.5 billion units, whatever it is.

It might be packs, it might be stick equivalent, so specific cigarettes. today uh we're at or excuse me 2022 we're at about 75 so approximately cut in half if they get cut in half again what is that 75 divided by 2 37 and a half right yeah yeah 37 and a half uh billion then they get cut in half again we would be at okay can i do this in my head oh that's a little tough one there something 0.25 we're at 35 divided by 2 is 17.5 plus 18.75 18.75 yeah i mean here's could they do that over the next 15 years could it go down to 18.75 billion whatever these units are and prices could go up by 4x or 15 to 20 years i don't think that's crazy i gotta say because what was it what's it gonna kind of cost 30 bucks

i i don't think that's i i don't think it's crazy that would be no no no it'd have to be way more right well that's for every same thing every half every halving or every time you cut the volume by 50 you have to double so it would go from 10 to 20 on a price per 20 to 40. And then if you're saying you're going to, yeah, so this is over the next $50. Well, that's, I mean, if

we're going to go 30 years in the future, I think that's a bit hard to predict, but my concern is that it could get worse from here. Like yeah, maybe I'm just like a city kid that just like doesn't have experience in middle America, real world where the

cigarettes live, but sorry, Not the cigarette slip, but maybe where consumption is a little more mainstream. But it's not – your customers that are dying off on the later end, the older people, they're not being replenished by younger folks as much anymore. and with all the alternatives it feels like i would not be surprised if this continued to get worse because i think you could get people that are existing smokers to actually switch off switch to things like icos you mean an accelerant yeah yeah oh yeah i'll get to that in the risk section that's the other thing i guess we didn't talk about is if icos does well that's not only like oh good for philip morris that it's like a double hurt to all because they lost the

opportunity to win in that market but it's also stealing probably share from marlboro oh yeah well hey you're spoiling the future sections but that is a great point listeners should if you're considering an investment in ultra group you should definitely look at philip morris international because they are encroaching on the united states market now the name doesn't really imply anymore as they've really embraced the risk risk reduced product space i think what i'm trying to illustrate and argue from that chart though is that it is not unreasonable that seven and a half percent volume declines could equate to stable revenues your summer travels deserve an upgrade with select chevrolet buick gmc and cadillac vehicles

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Because you could have said that you could, But the price of a pack of cigarettes, like not too long ago was two bucks. So here's the difficulty for me is that it's like, if you are raising the, so that we've seen the price per pack increase, they've had to increase the price by more than previous years to offset partly inflation, partly inflation. But yes, a lot. Yeah. A lot with volume reacting to, I think the volume declines.

last year you could have said oh wow eight percent volume declines that's you know hopefully hopefully that's a one-off year but they had to raise a bunch of prices more so than they ever have in order to offset that and then they got the same result in 2020 what was that 2022 basically they got two consecutive years of eight percent volume declines uh excuse me 2022 was the first year of... And then 2023 so far, just to be clear. So I worry that if they are having to raise prices just to keep revenue flat, you're getting... Maybe it's reasonable, maybe it's possible, but it's much more difficult. And I think they risk much faster volume declines. I don't really know what they could do about it, but I want to be betting on flat revenue

know would be my guess i think we're seeing it right now is revenue declines seems like a very real possibility yeah i'll run i'll run through some math here and see what you think see uh see if you have any uh concerns with the math whether you think it's too bullish but let's go through another section we talk smokables and black and mild's in there but i don't think it's crazy relevant now the next section i have is will non-smoke will create any value i want to be clear to start i do not assign any value to vaping we're just saying okay maybe it'll lose value i'm just basically assuming the three billion dollars boom no value it's gone could work it could work i mean enjoy has decent customer base you know that that's being very

pessimistic but i think it's fair to be pessimistic um i'm gonna assign no valley to this japanese tobacco thing whatever could show up and then uh the investments show up in the enterprise value so we're gonna use enterprise value knock everything out what matters here is going to be the smokeless segment which is oral tobacco another name for the oral tobacco and this can get split up between traditional tobacco and new age products i think it's clear if we look at traditional oral tobacco business or altrias it is getting crushed in the united states by the healthier tobacco-free nicotine pouches or excuse me they're traditional right i said traditional so copenhagen skull which have tobacco are getting crushed by the tobacco-free nicotine pouches that you may have

seen uh zin number one brand on velo etc and this is why altria's market share in this category has consistently started to climb i think there's no secret here and i think this should continue over the next five years however how i think obviously the balance this is with raising prices on the copenhagen and skull stuff that's going to continue and they're going to i mean if their market share with like zin has for any reference here 75 percent market share and i think it would be shocking if it got significantly higher because they're already so dominant i mean that's usually within these categories the leader has about 40 50 percent within a cpg category so it's been just tremendous it'd be like google i mean i guess those points they have a good little

advantage here versus the competitors but you know they're going to see volume declines here me see if i can get back on trap and i think it's possible you know revenue starts to decline in this segment despite these price hikes for the traditional products because as we're seeing the nicotine patches are gaining a ton of market share and i wouldn't be surprised if operating income is pretty damn stagnant over the next couple years or even down because they're going to have lower margins at the start for the nicotine pouches um i should have a reference here that this segment generated about 1.6 billion dollars in income for operating or excuse me in operating income for altria last year and it's not nearly as important as smokables but still

important you know what would you cap it right that's a decent amount of the value here um their their volumes have been fairly stable but if you look at the underlying trajectory of the industry on is a very small portion of these oral tobacco volumes So if the industry flips from majority traditional to majority pouches, the new age tobacco-free products, there's a world where Altria's market share, as it has, continues to go down and their volumes start to decline. So I wouldn't assign much value to this segment. Any thoughts there, Ryan? Does that make sense to you? No, I agree.

They don't seem very well positioned in the oral tobacco space, plain and simple. They have two really great chewing tobacco brands, but chewing tobacco as a category is seeing difficulty and it's largely being replaced by modern oral, the nicotine pouches of the world. So even though it's a small percentage of the overall oral tobacco space, I think it's going to keep eating away at it and they don't really have the winning horse in that category yeah i i know it's been so hard for to get stuff approved in this category and that's why zen has maintained its dominance because it's just been like something's up with the f there's i mean i

guess it's not surprising with a government body they're just not approving stuff and they're so so slow approving new products i don't understand why they're not using the copenhagen brand here like copenhagen you know how it's like diet coke versus right like why are you not using this brand it's such a good brand do you think that transition would would be possible do you think getting oh yeah do you think the on customers are copenhagen customers converted or just a new new age type of customer there's some data on this that it's like half and half um i don't know if there's any good there's some data out there and i know that they have some product approved it's like a snus product so it still has tobacco i believe but it's like

the enclosed pouch so it's not getting in your gums i should say that they are behind in this i don't think like things could get better over the next five years but i wouldn't bet on it. Yeah. Let's close this out because we've said a lot of pessimistic things about the business and you've been a little more optimistic. And by optimistic, I say, I mean that you said revenue could possibly be flat. The stock or the earnings or... We'll get to the earnings multiple here. Yeah. With all that said, it's a 9.2% dividend yield right now. Do you think this dividend's sustainable? Putting the numbers together, is this something that's ownable for you? Yeah. And I should say we're skipping management.

And before I get into that, I should say that with this business, I have no expectations for management. I have expectations for them to burn a billion dollars in value each year. And I really have them as placeholders because they have not proven anything with this culture. The culture has been bad from a capital allocation perspective outside dividends and repurchases. So i don't even care about what these people what they say like i just read the conference call and they talked about the they talked up for 10 paragraphs about the growth of on and the and the vaping potential and i'm just like guys like yeah and then they the first question was is a crapshoot yeah exactly exactly unless that is what it is unless it could change but

that's what we're going to assume until we get proven wrong um they did complain a lot about the elf bars essentially with the flavored stuff the disposables but it's almost like can you guys not you've spent so much in lobbying each year can you not figure this out and get that banned like they technically are illegal but use your power to whatever that's the whole thing just to put some context behind there basically there's regulation that doesn't allow for a lot of these disposables to be sold but the regulation is cotton candy and yeah exactly and by disposables i'm talking about the vapes that you see pretty much every young person kind of using or at least that's in in my life and by young person talking generally like 20 year olds and and between 20

and 30. they don't own those brands they well i guess enjoy could maybe be considered one but i don't think it is they don't own those brands so they're losing out to them but the regulation isn't being enforced and as i think the philip moore ceo called it he said unenforced regulation is just as bad as no regulation at all and that seems to be the case right now i think that was in the last comments call yeah and then another thing is the first analyst asks hey are the more the most important question for everyone it's pretty clear is our marlboro like what do you think about this volume decline right they're basically saying and they're like you know it's obviously getting worse like what do you think and management goes basically doesn't answer the

question so like look i i like one of the key things for us in looking into stock is trusting management since i have little trust in this management i want a significant discount when buying this stock because obviously at the right price anything's a buy we are so meticulous about management but after a nine percent dividend yield we close our eyes as uh we were talking about the late charlie munger and i was watching the thing where he was like look if something gets cheap enough and it's big we might buy it are we correct to do that i don't know but it will probably work at the right price something like this works i think the key here is there's a difference between thinking a management team is shady versus in like just not that great

because if a management team is shady that's when we go no matter how cheap something looks We're not going to touch it, but they could have some ham sandwich stuff here. Okay, back to your question, the dividend stuff. I'm going to try to go through the math. There's not too many variables, but with this, the most value here is the yield's approaching 10%. I guess it's kind of gotten closer to 9% because the stock's gone up, but the most important value here is going to be from the dividend.

Altria can provide solid returns if you think the dividend can remain stable over the next five years. You'll get about half of your money back before taxes. And I want to make clear here as a note, I would only buy Altria Group in a tax-advantaged account like a Roth IRA and not reinvest dividends. I think it's interesting to evaluate it as a very high-yield bond-like equity, and then you use the dividend tax-free, to be clear, to fund other investments from businesses I think have higher quality.

I think it's the right way to go about it here. So I'm going to go through my assumptions, Ryan. And I have a Google Sheets that I'll try to put at least the relevant data into the newsletter. One, 7.5% volume declines counteracted with price increases to keep revenue stable from smokables. And this is for the next five years. Two, smokeless segment sees stable revenue, but declining margins due to lower margins on the on business.

And then operating income grows by 2% per year due to the consistent margin expansion at smokables unstable revenue uh for 1.3 billion dollars each year spent on interest expenses i increased it slightly because the higher interest rate risk could be a lot lower we don't really know i think i want to be a little conservative uh put in a 20 corporate tax rate who knows they could have got a lot they got the jewel asset that's written down could be a lot lower i'm putting 20 want to be conservative uh two more one billion dollars spent on share repurchases each year, net of stock-based compensation. That's kind of at a pace they're at. They went a little higher sometimes, but also a little lower. And then lastly, $1 billion handicap

each year for dumb management decisions. So trying to X that out, because historically, let's be fair, we should do that. And then the rest gets paid out on a dividend. Before I go into what this means, anything here look wildly off to you? No, I've already kind of expressed some of my concerns about 7.5%. Maybe you can make the case the operating income can still grow, but I think it's... No, I mean, let's go through the math. It can grow because smoke holes margins can easily hit something like 70% under a scenario where prices are going up by 7.5% a year. Because they'll be doing 7.5% less volume each year, but no decline in sales.

so yes but seven and a half percent volume declines is an improvement when they're having to raise prices by more than they ever have so just saying it's blended blended with black and mild but you know the the cigar business it's just okay yes it's the operating income growth is achievable at yeah i understand the math makes sense but i think the seven and a half percent is even being a little optimistic well okay yeah i think i think it's kind of you know it's kind of a question i that's the uncertainty for me yeah i also think there's an uncertainty where it's not unrealistic it goes back to six percent i don't think that's unrealistic maybe the eight percent declines right like i think it's i would bet that it's going to look

significantly worse next 10 years than it did over the last time but yeah it could still be you know five percent six percent declines as opposed to the three to four percent that you were seeing between 2010 and 2015 yeah yeah okay so all those assumptions i laid out which again this part's a lot of math so go to the newsletter i'll try to keep it less numbers-esque for the uh just the show here, now this is an illustrative assumption because I kind of ran through this for the last 12 months, putting all that stuff I have in there. There would only be $3.51 per share in dividend payout capacity from their cashflow, but its actual payout was $3.80. So I think it kind of shows that I'm trying to just kind of even discount what they're doing today. Now, a lot of this can

come from, some of the payout can come from cash on the balance sheet, divestitures, but it's supposed to be a conservative assumption because I want to know what I can still maybe earn over the next five years as an investor if things go poorly as they kind of are. However, even with high interest rate expense, 20% tax rate, billion dollar buyback, billion dollar handicap for management each year, which I guess the buyback is not a negative, the dividend per share capacity will still grow to $4.96 in year five. So from year one to year five, the stock would have a cumulative dividend per share payout capacity of $20. For a stock price slightly above $40, I don't think that's a bad deal. To me, this is, as we talked about, a pessimistic scenario,

but Ryan might argue you got to be a little more pessimistic here. You get half your cash back, again, not reinvested. I don't think that's, it's not bad. It's not bad. So what price would I buy it at? I'm not exactly sure. I'll try to run through the math maybe of what it would look like. But I think at $40, I was like, yeah, I could definitely see myself when I got there. I think earlier this year, I was like, wow, this kind of looks right in my buy window. But I know for a fact, if we kind of go down another level to $35, I would be crushing the buy button. So I think in between $35 and $40 is what I would be looking at to implement this, depending on what the other opportunities i see out there yeah yeah i just i mean it makes sense in a tax-free

account to collect the dividends i think you're about to talk about this maybe you already mentioned it collect the defense reinvest them elsewhere i can get behind it but i just worry that your your scenario isn't the most pessimistic that it could be and that if things were worse you basically i mean it's not going to be a zero but you're probably getting less than treasury returns so i don't know part of me thinks like just buy treasuries but or like if you're okay if you're We're going to buy an equity and we're not doing this for the fund anymore, right? There's no, even though we try to avoid short-term orientation, there really isn't any need for it, right? All we care about is our own personal portfolios for the long run.

Why not take something where you might get a lumpier 15 or 20 over the next 10 years? Yeah. I mean, to be clear, I'm not buying it today. At this price, I think it's a good, I don't know if I'd call it ballast, but at the right price, the returns here are pretty hard to screw up. To put your own words into this, why would you own this over Amex at 14 times earnings? Well, I would say at this price, I like Amex better, but at $38, I tried to run the math and you would be at a 13% dividend yield at the current share price in year five. And I think people should consider like, oh, I'm going to half it back.

But remember, in year five, the stock could be down a lot, a significant, significant amount, which would destroy some value for you. It could be down by more than the 50% that gets taken out. So that's where you could lose. Yeah, but I think it would be hard. In the next five years, even if the concerns Ryan has, they're real. We shouldn't disclude them.

But even if they have this falling declines that are very, very aggressive, over the next five years, they should still be able to do quite well, raising prices. And I don't think the dividend will go down because they've done 50 years in increases and that's their most important thing. I think you got to use that to your maybe know-how because maybe they should invest a little bit more into the buyback at the cheap enough price, which means the per share dividend can grow a little bit more aggressively,

but yeah. All right. I think we've gone for basically an hour. Your final ruling here is that you want to own it today, but, but it's close dollars. All right. But we got to put a title on this that gets people to listen. So we're going to say, yeah, we'll figure out Altria for a later date or something like we'll figure out something. I know you got to do a little bit of a tease, a little bit tease title.

Yeah, but let's go through the risk. The two big risks, I think, to sum things up. One, rise of risk-reduced products that Altria doesn't own. It would be great if Altria could have a similar thing to Philip Morris International in the European market and some of these other places, if they could drive Marlboro users to quit while raising profits and then bring them over to their own RRPs and nicotine pouches and vaping. However, you know, British American Tobacco is leading with legal vaping in the United

States with, what the hell is it, VOOS, I can't ever pronounce it. And then Philip Morris is dominating, excuse me, Philip Morris International is dominating with Zinn, the nicotine pouch brand. So Altria's had decent success, you know, nicotine pouches, but it's much smaller than Zyn. Enjoy could have some success, but I have no idea. What if Ico starts getting momentum once PMI, Philip Morris International, gives it a full marketing push over the next couple of years? I mean, Altria's not out of the RRP race, but it is well behind. Management has a goal of hitting $5 billion in sales by 2025 for these categories for the smoke-free business.

I don't know if that includes vaping, but honestly, who knows? Would you probably leave maybe $2.5 billion in operating income given the margin profiles of some of these things? They're quite attractive. How much value is left there if that's it? It's not going to be it in five years, but if the path is to it, maybe people will price that in. Second risk I'm worried about is more

altruism management dumb decisions. you know it's no secret they can't get out of their own way um they would do much better and they haven't been able to get out of their way for the last 50 years but it hasn't mattered because the businesses are so good if they stay disciplined with the dividend and repurchasing stock like if we got back that five billion dollars from management dumb decisions in my estimates here and they repurchase stock well things would look a lot more attractive but you know the jewel acquisition 12.8 billion dollars in wasted money plus the extra debt it delayed on the balance sheet with interest expenses,

time value of money. It could have been used for elsewhere. You know, what's the net present value of that? A lot, a lot. Swedish match. Quite a bit of money. What? Could have bought Swedish match.

Here's my question to you, Brett, and I think this is the one we should end on. Is it worth the headache? Is it worth? Well, I don't know if it's that big of a headache because you just, if you don't reinvest the dividends, I don't know if it's that big of a headache. Like, yeah, don't make this 50% of your portfolio.

Like, wouldn't you just rather own something where the business is not in terminal decline? Like, we can pick from anything. Like, why do we pick the one where it's like, yeah, maybe we can get enough juice out of this. But every quarter that we open up that press release, we better hope it doesn't say worse than 10% volume declines. yeah I mean if you can tell me a business that's guaranteed to grow I will put money into it

there's risk without a business yeah but there's businesses that have a lot more benefiting factors a lot more tailwinds yeah for sure yeah at the end of the day it's better to invest

in the industry tailwind versus industry headwind, but yeah. I don't know. I just don't think it's worth the headache for me. But I can see, listen, if you're just collecting the cash,

I'm saying why not just own bonds? Why not find a bond? Well, because you can own a 10% bond. Because you can own a 10% bond. I know. You could find probably an actual 10% yielding bond that's similar.

Well, I don't know. have to have the capital to do that i guess that's true i just looked at ultra's bonds 5.6 which i find funny the uh yeah hey not a bad gig not a bad gig um yeah they have some 2061s out there that's someone that's not too worried about the the business going away yeah Hey, if we're listening, I would love to know why this is too pessimistic. To anyone, let us know. I'd love to know why. I would love to hear a convincing argument for that.

But that kind of ends things. Ryan, anything, you don't have to have anything top of mind for when we do this. I think the next one would probably be starting in 2024. Anything at top of mind for you? No. No, I don't have a stock in mind yet. But unfortunately, in the time that our savings have been in limbo, we've had like a record month.

So that's quite frustrating. Yeah, would have been a good year. Would have been a good year for us. Aside from that, maybe I'll find something here in the next month. We're doing luxury though. Next week, if you're listening right now, next week, we're going to have a not so deep dive on. Is it LVMH first?

I have no clue. I have no clue. We'll get on it. We'll get on it. It's luxury month. Yeah, we're doing LVMH Ferrari Hermes and we have a luxury overview with two guests on an interview.

So watch out for that. All right, let's hit the disclosure. We are not financial advisors. Anything we say on the show is not formal advice or recommendation. Ryan and I may hold securities discussed in this podcast. Thank you everyone for tuning in and we'll see you next time.

Thank you.