I'm Addicted to Cigarettes | Recent Buy (16)

Dividend Growth Investing | Recent Buy | Financial Independence | Stocks

Welp I have to admit it: I'm addicted to cigarettes...stock that is.  As a reformed smoker I have to say that there's definitely a captive audience for the tobacco companies and that it was incredibly hard to finally quit smoking.

Letting go of one vice was definitely a good thing, but picking up another has been more profitable!

One of my goals for my FI Portfolio for 2019 is to build up the positions rather than build out the number of positions.  Essentially I want to increase my exposure to the companies that I own instead of many smaller positions that make it hard to be motivated to monitor the company.  With the dividend growth strategy I still think it's fine since the bulk of the work is done upfront; however, I still think that in general the less the better.

I first purchased shares of Altria (MO) in March 2018 and since then have continued to add to that position with 4 additional purchases.  

On Tuesday I purchased 11 more shares of Altria (MO) at $43.405 per share.  After commissions...HA! Nevermind, Fidelity slashed their commissions to ZERO, the total cost basis comes to $477.46 or $43.41 per share.  Based on the most recent dividend payment of $0.84 per share this lot carries a YOC of 7.74% and I can expect to receive $36.96 in dividends over the next year.  Altria is a Dividend Champion with 50 consecutive years of dividend growth.

I now own 108.242 shares of Altria in my FI Portfolio with an average cost basis of $49.21.  The entire position carries a YOC of 6.83% and I can expect to receive $363.69 in annual dividends.  

Due to this purchase my FI Portfolio's forward 12-month dividends increased to $7,602.16.


As a dividend growth investor any potential investment must Jerry Maguire me, i.e. "SHOW ME THE MONEEEEEEYYYY!!!!".  I judge that based on a company's history of both paying and growing dividends to shareholders.  Altria's 50 year streak of rising dividends certainly qualifies them as a prolific dividend grower.  

*A full screen version can be found here.
**The "cuts" were due to spin-offs of Kraft (KFT) and Phillip Morris (PM).

Altria's 50 year streak alone puts it in rare territory, but when you add in the fact that dividend growth has regularly been in the upper single digits to low teen's each year that just makes it even more attractive.  Dating back to 1990 and excluding the "cut" years, year over year dividend growth has averaged 12.0% per year with a median growth rate of 9.4%.

The 1-, 3-, 5- and 10-year rolling dividend growth rates since 1995 can be found in the chart below.  

*A full screen version can be found here.


One valuation method that I like to use is dividend yield theory.  The idea behind dividend yield theory is that large, stable companies will see their dividend yields revert to their mean over time.  So when the yield is higher than "average", shares are undervalued and when it's lower than "average", shares are overvalued.

*A full screen version of this chart can be found here.

The 5-year moving average dividend yield for Altria currently sits at 4.45% while the YOC for the latest lot is a very substantially higher at 7.74%.  Based on dividend yield theory that suggests a fair price of $75.51 or roughly 74% higher than my purchase price.

The fair value range, +/-10% of the 5-year yield, suggests a "fair" price between $69 - $84.  Those levels represent potentially 58% to 93% upside, respectively.  I'd love to see the share price return to those levels; however, even in a scenario where the "average" yield is 6.50% that still gives a fair price of $51.69 and 19% upside potential.

Based on a quick and dirty Gordon Growth Model calculation Altria needs to grow the dividend just 2.1% per year in order to generate 10% annual returns which I believe is easily achievable for Altria over the long term.

When examining the valuation multiples of Altria, the valuation looks extremely compelling.  Based on 2019 estimates of $4.19 and 2020 estimates of $4.49 shares are trading at a 10.4x and 9.7x P/E multiple, respectively.  

I've also started looking at multiples using enterprise value.  The reason I like using enterprise value is that it encapsulates purchasing the entire business, both the equity and the debt, net of cash.  I think this better encapsulates the true cost to buy the business.  Using EV/EBIT, Joel Greenblatt's Magic Formula valuation metric, Altria is trading at a 10.7x multiple or a 9.4% EBIT yield.  Looking at EV/EBITDA it's 10.5x or a 9.6% EBITDA yield.

Using the analysts' 5-year EPS growth estimate of 6.59% puts the estimated annual returns, before accounting for valuation changes, at a very hefty 14.3%.  Adding in the likelihood of positive valuation changes enhances the possible returns.


While some people might balk at investing in tobacco, the fact is that it's been one of the best investments you could have made over the last 50+ years.  The stigma around the tobacco industry and persistent threats of regulations typically keeps shares valued relatively cheaply which pushes up the dividend yield.  That is an excellent combination where even just so-so growth can lead to out-sized returns whenever sentiment changes.

Altria looks very attractively valued all things considered.  The dividend yield is among the highest that it's ever been and despite the poor and expensive investments in JUUL and Cronos, the core business is still in tact and the dividend is well supported.  

I've started compiling the dividend history, growth rates and dividend yield theory for many dividend growth companies.  Altria's can be found here and the remaining companies that I've already gathered the data on can be found here.  As new companies are added the list will be updated.

What do you think of my purchase of Altria?  Have you added shares with the nearly 8% yield?