With the volatility we've been seeing in the market lately, I think there's some good opportunities to deploy some cash. My portfolio and watch list consists of blue chip dividend stocks (with the exception of BRK.B). The two most compelling buys I find right now are BRK.B and MO.
Here are the reasons I believe MO is a bargain right now
- Forward PE ~ 12.5, EV/EBITDA ~ 11.3
- Yield ~ 5.9% (on average it's around 4.5%)
- Solid balance sheet. Debt/EBITDA ~ 1.30 (Anything less than 2.5 is considered pretty safe).
- Interest coverage ratio ~ 14.35 which tells me the quality of their debt is pretty good.
- Return on invested capital consistently above 30% (S&P averages 13%).
- Management expects EPS growth (and subsequently dividend growth) of around 7-9% for the next two years. Due to the inelastic nature of tobacco and the Marlboro brand name, MO has significant pricing power. Cigarettes in the US are still pretty cheap compared to the rest of the western world (https://www.statista.com/chart/15293/price-for-cigarettes-per-country/). This combined with low capex spending and solid cash flows make for a high yield and a consistently growing dividend.
- The new CEO (former COO), Howard Willard, has played a key role in previous large acquisitions such as John Middleton and US Smokeless Tobacco. Both acquisitions have turned out to be smart choices by management.
- MO is well diversified. In addition to cigarettes, they sell cigars, smokeless tobacco products, wine, own a 10% equity stake in BUD (single largest brewer in the world) and have just shown they will be moving into marijuana as well. They can afford to pay for their stake in CRON with cash outright (Approx $2.3 billion in cash on the balance sheet).
- Their recent announcement of discontinuing their e-vapor products tells me they are expecting either FDA approval for IQOS, an equity stake in JUUL (their balance sheet gives them enough room to take on some debt) or possibly both.
Declining cigarette use and the risk of FDA regulation is often cited as a reason to avoid investing in MO. I believe their strong balance sheet, diversified sources of revenue, strong pricing power, shrewd/shareholder friendly management and opportunities for growth in alcohol, reduced risk products and marijuana will continue to generate profits for shareholders in the long run. On a more speculative level, seeing the consolidation amongst other tobacco players (BTI acquisition of RAI), there's a chance MO and PM might recombine at some point in the future. At its current valuation, I believe MO is a strong buy.
I respect the fact that a lot of people have moral and ethical reasons for avoiding a direct investment in tobacco. This was meant to highlight MO purely from an investment point of view.
I am long MO and PM.
Submitted December 08, 2018 at 04:30PM by vipnasty https://ift.tt/2C0A95r
