Altria Group, Inc. (NYSE:MO)
In earlier articles regarding Altria Group, Inc. (NYSE:MO), I discussed the company’s potential to weather a recession and other economic downturns. And, with a harsh recession on the horizon, Altria might be one of the better selections (and investments) over the next few years. It is also important to note that the stock has outperformed the S&P 500 (SPY) since my last article was released. While the S&P 500 fell over 16%, Altria is trading at around the same price as it did in December 2021.
In this article, I will explain the reasons why I think Altria Group’s stock is a strong buy in a recession and why Altria investors should hope for a recession (maybe not, but compared to many other firms and equities, Altria would most likely perform very well) (maybe not but compared to many different companies and stocks Altria will most likely perform quite well).
Reason I: Stock is Recession-Resilient
To understand why Altria Group is a smart bet for a recession, consider MO stock performance over the previous five decades. And while the stock fell precipitously multiple times (for example, more than 50% from its prior high recently), the reasons for these precipitous drops were not economic recessions. And, when looking specifically at US recessions over the previous three decades, the stock performed admirably. The most significant reduction connected with an economic recession occurred during the Great Financial Crisis. Yet, even then, the stock outperformed the entire market.
Moreover, MO stock dropped just in the teens throughout several past recessions, barely entering the bear market territory. When you consider the stock’s current valuation multiples (which we will discuss later), the downside potential may appear to be relatively limited.
Reason II: Hardly Declining Demand
Stock performance is crucial for investors, and no one wants to see their assets lose two-thirds of their actual worth. However, the performance of the primary underlying company is far more essential than the performance of the stock price. Altria Group’s stock has done well in times of economic turmoil, and the fundamentals have also performed well. When we look at revenue, for example, we see reductions. Still, most of these declines cannot be attributed to recessions. For example, Philip Morris International (PM) was spun off from Philip Morris USA, resulting in a steep revenue decline before the Great Financial Crisis.
When earnings per share are included, the result is similar. For example, we have seen sharp reductions in profits per share in recent years. Still, it is once again difficult to correlate these declines to recessions.
Of course, this is not surprising considering the company’s business model and the products it sells. In my first post about Altria Group, I stated that while cigarettes and cigars are not essential requirements for customers, they are highly addictive, resulting in consistent demand for the goods even during economic downturns. In the same paper, I discussed how these addicting items cause customers to incur switching costs.
It may seem weird to define addiction as switching expenses, but transitioning away from the product is incredibly tough for Altria Group’s clients. Switching to a competitor’s product appears easy, but many smokers find it difficult to quit smoking. While many smokers attempt or aim to stop, only a tiny percentage succeed (although numbers of smokers are constantly declining as fewer young people start smoking and some smokers manage to quit).
Reason III: Severe Recessions and Smoking
A consistent customer base benefits any business, especially during economic downturns. But we may assume that existing smokers will not continue to smoke. Instead, according to research, existing smokers may smoke more, and some may even start smoking again in the occurrence of a recession (or depression).
Research examining how the Great Financial Crisis affected the number of smokers in the United States found no significant changes in smoking prevalence patterns between 2005 and 2010. However, the same study found a 2.4 million rise in smokers among the unemployed. In contrast, the number of smokers grew during the Great Financial Crisis. When cigarette smoking rates in the United States are continually dropping, an increase from 19.8% in 2007 to 20.6% in 2009 (statistics for adults) is noteworthy.
Other research has reached similar outcomes. For example, according to a Canadian study, the unemployment rate raises the number of cigarettes smoked among daily smokers. Furthermore, parents in the United Kingdom who were “income poor” during the Great Recession were likelier to start smoking or smoke more heavily (according to this study).
Conclusion
I will continue to avoid Altria for a variety of reasons. Aside from causes that have nothing to do with basic investing and that I won’t get into here, I want to invest for the long term, not simply in companies and stocks that may do well in the following years (or during the next recession).
And I’m not going to say Altria Group is a horrible investment (especially as shareholders holding on to the stock in the last decades have been rewarded). However, aside from the dividend, which may or may not be sustainable, Altria Group is struggling to expand its top line. In addition, the business model is undoubtedly experiencing fundamental issues as the number of smokers continues to drop. There are two reasonable opinions on Altria Group – a negative and a bullish one – and both may be justified. I am opting to sit on the sidelines since it is not the type of firm I choose to invest in.
Featured Image- Megapixl @Timonschneider
