Cabot’s “Secret Stock” — 6.1% Dividend, Anyone?

by Travis Johnson, Stock Gumshoe | January 15, 2019 4:25 pm

What's the "secret stock" being dangled by Cabot Dividend Investor?

Quick and dirty today, dear friends — I’m running short on time, so we’re jumping right into a simple teaser solution for a stock that a lot of people hate, and a lot of people have made a lot of money from. The ad I saw was from Tom Hutchinson, who is chief analyst of Cabot Dividend Investor ($360/yr) and, well, he had my full attention as soon as he put “secret stock” in the headline

Here are the clues from Cabot Dividend Investor

“Want to know a great stock that pays out a 6.1% annual dividend and has great growth potential too?

“I’m talking about a stock that has had a total return of 489% over the last 10 years….

“… that’s on top of 49 years of growing dividend payments…

“This company sells a variety of products that fall more or less in the ‘vice’ categories of alcohol and tobacco.”

That’s enough to get an answer, most likely, but we do get a few more tidbits… it’s alcohol holdings “include some of the biggest, mass market brands as well as smaller, high-end product lines”

And

“… the coming legalization of marijuana across North America is yet another growth opportunity for the company.”

So it’s not just a “secret” stock, maybe someday it’s a “pot stock” too? The ad hints that they are “moving aggressively” into marijuana.

And we get a couple specific clues that should make things even easier for the Thinkolator:

“Through good management and buying back shares, per-share earnings have grown by more than 11% for the last 5 years.”

And the company took a hit to its stock price last year, we’re told, though it did better than its tobacco competitors… and kept growing that dividend.

So what’s the stock? This is, of course, dear old Altria (MO), the mostly-US part of the old Philip Morris (Philip Morris International (PM) was spun out a decade or so ago).

And yes, Altria has been probably the single best investment for the market in the past 75 years… at least, the best “regular” stock that didn’t emerge from nowhere and go bonkers, like Netflix (NFLX) or Amazon (AMZN). That outperformance has continued even in the much-more-regulated modern era for cigarettes, here’s what the chart looks like for ALtria’s total return compared to the market over the past 20 years (compared to the S&P 500 and a couple utility and consumer staples ETFs):

MO Total Return Price Chart[1]

MO Total Return Price[2] data by YCharts[3]

I’m not willing to own tobacco companies directly (I’m sure I have some in my mutual funds), and I can’t say that their recent decision to invest heavily in Juul Labs has me feeling any better about them, personally, but MO has certainly been a fantastic long-term investment.

Will that continue as smoking continues to fall? Well, that probably depends more on whether vaping becomes (even more) mainstream and keeps some of that nice fat profit margin for them, since nicotine addicts can be profitable customers whether they’re burning or vaporizing the stuff, or on whether they’re able to lever their way in to build or buy some big brands in marijuana, as I’d guess they would very much like to do (they’ve already agreed to buy 45% of the Canadian marijuana company Cronos (CRON) for $1.8 billion… with, somewhat like Constellation’s (STX) agreement with Canopy Group (CGC), the possibility of getting a controlling stake in the future with warrants).

They have been facing a long slow decline in smoking rates for decades, and massive taxation, but have also been able to raise prices to levels that we would have considered absurd 20 years ago — and enough people keep smoking to keep the cash register ringing quite nicely for them, so I don’t really know where the seesaw begins to pivot. Does the recent weak performance, and the regulatory backlash against Juul, mean that they’ve topped out and won’t be able to keep increasing cash flow? Or is this just another stumble for a dominant business that serves brand-loyal addicts? That’s the question I’d be asking about MO, but it’s also a question I would have been answering incorrectly over at least the past decade, to my financial detriment, so you might want to form your own opinion on this one.

Altria does have wine and beer investments — they own a wine business that’s essentially a rounding error on the income statement, and they still own about 10% of Anheuser Busch/Inbev (BUD) — but unless they decide to sell those BUD shares in a hurry the rise and fall of earnings will continue to be dominated by their dominant brands in cigarettes (Marlboro, with a 43% market share in the US, light years beyond everyone else) and in smokeless tobacco (Copenhagen and Skoal, which together have about 50% of the super-gross spitting market — yes, if you’re a chewer I still love you, and I’ll take that over your smoke going into my lungs, but that spitting in a cup thing is disgusting).

That dramatic outperformance over the past 20 years obscures the tough time Altria has had over the past year and a half, so here’s a shorter-term look, just for some perspective:

MO Total Return Price Chart[4]

I would assume that the returns for Altria will be fueled largely by the dividend going forward, and it does yield about 6%, so that gives you a better entry point than you would have seen a year or two ago… and the trend is still improving in the major criteria that impact dividends. This chart shows the past nine years (including the first few months of 2009 obscured things a bit, so I cut them off), including the share price (blue), dividend per share (orange), operating income (green), and share count (red):

MO Chart[5]

So as of the past few years, the dividend keeps rising, the operating income keeps rising, and the share count keeps falling… that helps the per-share dividend and earnings numbers to look better, and it begins to look as though the fall in sentiment about Altria is really just the share price coming back to earth and returning to the trend line established by their dividend growth. Long-term debt has risen a little, but is still only about $13 billion (versus a $90 billion market cap), and the debt service so far seems to be easily covered (they spent $5 billion a year just on their dividend, the debt costs them a lot less than that).

My best guess is that Altria’s share price will track its dividend growth over the next few years — and given their fairly aggressive dividend growth history, that probably means the stock has a decent chance of 10-15% annual returns… assuming that enough people keep smoking and vaping and chewing to keep their revenue flat or maybe even growing by a percent or two, and that they can keep raising prices to increase earnings. Even if Juul and Cronos do really well, they aren’t likely to massively change the income prospects anytime soon — their revenue is just so small in comparison to Altria’s core cigarette business, though Juul has certainly had some phenomenal growth to date.

What’s not to like, really, except for the fact that it’s largely a tobacco company and I won’t buy those, and except for the still-hefty regulatory risk as the vaping products, one of their major growth hopes, come under pressure from the FDA (which recently pushed to restrict the fun flavors of vape “juice” because kids, for some reason, were attracted to cotton candy and gummy bear flavors of nicotine)… though if there’s a company that has come through intense government regulatory pressure (and societal backlash) stronger than Altria has, at least in profit terms, I can’t think of it — Facebook (FB) might want to be taking notes here.

Not much of a “secret,” as you might note, since Altria and its tobacco peers have been among the best performing stocks, with Altria really leading the pack for most of modern history, and they do pay a very visible and high dividend, but, well, I said it would be a quickie — go forth and do with it what you will, and let us know if you’ve got any Altria thoughts with a comment below. Thanks for reading!

Disclosure: I own shares of Facebook, mentioned above. I do not own shares of any other stock covered, and will not trade in any stock covered for at least three days, per Stock Gumshoe’s rules.


Endnotes:
  1. [Image]: http://ycharts.com/companies/MO/chart/#/?maxPoints=850&recessions=false&annualizedReturns=false&quotes=true&note=&annotations=&useEstimates=false&source=false&securitylistSecurityId=&startDate=01/14/1999&securityGroup=&correlations=&legendOnChart=true&splitType=single&format=indexed&securities=include:true,id:MO,,include:true,id:SPY,,include:false,id:VNQ,,include:true,id:XLU,,include:true,id:XLP,,include:false,id:ACT,,&title=&partner=&endDate=01/15/2019&displayTicker=false&units=false&zoom=custom&scaleType=linear&calcs=include:false,id:price,,include:true,id:total_return_price,,&securitylistName=&quoteLegend=true&useHttps=false
  2. MO Total Return Price: http://ycharts.com/companies/MO/total_return_price
  3. YCharts: http://ycharts.com
  4. [Image]: http://ycharts.com/companies/MO/chart/#/?maxPoints=850&recessions=false&annualizedReturns=false&quotes=true&note=&annotations=&useEstimates=false&source=false&securitylistSecurityId=&startDate=01/14/2017&securityGroup=&correlations=&legendOnChart=true&splitType=single&format=indexed&securities=include:true,id:MO,,include:true,id:SPY,,include:false,id:VNQ,,include:true,id:XLU,,include:true,id:XLP,,include:false,id:ACT,,&title=&partner=&endDate=01/15/2019&displayTicker=false&units=false&zoom=custom&scaleType=linear&calcs=include:false,id:price,,include:true,id:total_return_price,,&securitylistName=&quoteLegend=true&useHttps=false
  5. [Image]: http://ycharts.com/companies/MO/chart/#/?note=&maxPoints=850&splitType=single&securities=include:true,id:MO,,include:false,id:SPY,,include:false,id:VNQ,,include:false,id:XLU,,include:false,id:XLP,,include:false,id:ACT,,&startDate=01/14/2010&zoom=custom&annualizedReturns=false&securitylistName=&title=&annotations=&calcs=include:true,id:price,,include:false,id:total_return_price,,include:true,id:dividend_per_share_ttm,,include:false,id:dividend_yield,,include:true,id:average_shares_outs_diluted,,include:false,id:revenue_per_share_ttm,,include:false,id:normalized_eps_ttm,,include:true,id:operating_income_ttm,,include:false,id:revenues_ttm,,&partner=&useHttps=false&scaleType=linear&format=indexed&securityGroup=&endDate=01/15/2019&quoteLegend=true&useEstimates=false&securitylistSecurityId=&recessions=false&correlations=&legendOnChart=true&quotes=true&displayTicker=false&units=false&source=false

Source URL: https://www.stockgumshoe.com/reviews/cabot-dividend-investor/cabots-secret-stock-6-1-dividend-anyone/


  1. Avatar
    Glenn Henderson
    Jan 15 2019, 05:07:39 pm

    I bought a bunch of it before dividend ex date. I think it’s a great buy at high 40’s.
    There getting into the cannabis business looking down the road with JUUL also.
    There no dummies there thinking ahead.
    I think this stock can double in a short time less than 2 years…

  2. 20 |
    Avatar
    heavywhale
    Jan 15 2019, 05:16:00 pm

    I bought a small position recently primarily for an historic collector reason – kind of like owning a wholly mammoth bone,

  3. Avatar
    eltonatl
    Jan 15 2019, 05:24:23 pm

    Yes, if you make a highly addictive product you can make a lot of money even if it slowly kills your customer base. If we had any sense we’d ban nicotine by mandating a 20% per year reduction in values until it was gone. Let’s see how popular Altria’s products are when they aren’t chemically addicting.

    • 1555 |
      Avatar
      hedy1234
      Jan 15 2019, 05:49:36 pm

      Addictive products, and there are many legal ones, are normally great financial investments. Alcohol, drugs, coffee, etc. There is still money to be made based on the “Vices”.

      • Avatar
        BJI
        Jan 15 2019, 09:38:50 pm

        Coffee is the largest single source of antioxidants in the American diet!!! I would reconsider calling coffee consumption a vice.

      • 11441 |
        Travis Johnson, Stock Gumshoe
        Travis Johnson, Stock Gumshoe
        Jan 16 2019, 07:24:57 am

        Addiction is at the heart of many successful investments, to be sure, whether you call anything a “vice” depends on your specific mosaic of morality.

        I’ve got no problem investing in lots of sectors that many people find objectionable, including alcohol and gambling and candy.

  4. Avatar
    boldtruth5
    Jan 15 2019, 06:00:21 pm

    As a recent new member I do appreciate your thoughts on Altria. I did buy a small of shares (40) as a dividend stock reinvestment play in a retirement account. Being an ex smoker myself I steer clear of purchasing their products but thought their exposure to other businesses could help increase the future stock price. Glad to find this discussion thread.

  5. Avatar
    Vaughn
    Jan 15 2019, 08:22:59 pm

    Travis, I like your moral compass, in that it totally aligns with mine. So I guess neither of us are going to invest in skag producer/seller companies when they go legit either hey? Back when, I used to wish and hope that whoever had first twisted a cigarette and then profiteered from it would roast in a particularly hotter corner of Hell, and that’s been my sentiment even ’til now! Good on ya mate!

    • Avatar
      Angelika bowersox
      Jan 15 2019, 08:41:17 pm

      Travis I admire your moral compass also, but was wondering if Vaughn owns any motor vehicle stocks ( F, GM, Tesla…just to name a few). He is being pretty inflammatory and upset. There are better ways to express oneself than that.
      Having said that Travis, thank you for all you do. You are an amazing breath of fresh air out there. Thank you

  6. Avatar
    fabian
    Jan 15 2019, 10:19:19 pm

    What pushes my button is to smoke a good cigarette. They are even better after a two mile swim. I don’t smoke MOs because I found a way to skip the taxes and enjoy my vice for $ 20/month. And I bet that’ll burry most of you. I’m long MO for the dividend from times to times. I don’t think tobacco will ever disappear. It’s the best drug ever. It cuts hunger, improves concentration and gives you energy without making you hedgy. Since people quit smoking, the use of anti depressants has skyrocketed by 400% and it’s only the beginning. Wait until the next financial crises pops up. OK it kills you but dying is a fact of life anyway so you’d better get use to it. And finally, it’s so good not to listen to your parents; don’t do this, don’t do that. Boring.
    https://psychcentral.com/news/2011/10/25/antidepressant-use-up-400-percent-in-us/30677.html

    • 11441 |
      Travis Johnson, Stock Gumshoe
      Travis Johnson, Stock Gumshoe
      Jan 16 2019, 07:19:34 am

      As long as I don’t have to breathe it, I’ve got no problem with adults doing whatever they want to their own bodies. Certainly anyone taking up smoking as an adult now is making an informed choice.

  7. Avatar
    Ron S.
    Jan 15 2019, 11:54:51 pm

    I lost my father and an uncle to emphysema. Both experienced a protracted time of difficult disability before dying, not being able to process enough oxygen properly is a terrifying feeling. Neither would listen to warnings but both deeply regretted smoking after it was too late. I agree with Travis, I do not want such companies in my holdings no matter what the dividend pays.

  8. 71 |
    Avatar
    hunter007
    Jan 16 2019, 11:27:22 am

    Im thinking if you can’t beat em’ May as well join em’. In that if you don’t like smoking, as I am in that camp… you can still profit from the companies that produce cigarettes. Same as my organic diet, as I hate Chemically laced food…but I’m not opposed to buying Monsanto or Potash. My thoughts.

  9. 74 |
    Avatar
    bunion132
    Jan 16 2019, 08:02:41 pm

    Moral compass aside…I’m interested in holding this stock. Unfortunately, with “holding” as the operative word, it has been too much of a challenge to do so. Surely I’ve tried to get in at what I thought was a reasonable price (more like bottom-fishing) only for the stock to fall even further, forcing me to sell. Rinse and repeat – as though the stock is in a bottomless pit. Does anyone realize that the current price level of ~$47 is where the stock was back in Autumn 2014? (Yup, over four years ago; that’s how low it has fallen and can’t seem to get up.)
    The analyst for the newsletter must be the ultimate dividend fan, or has lofty hopes for MO’s partnerships in the cannabis space. Maybe he was simply paid well for his write-up?

  10. 15
    Avatar
    amdeist1
    Jan 24 2019, 07:19:59 pm

    While MO is a great company, I have a problem with it’s .6 current ratio and its share price more than 5 times the book value. There are many companies in this sector that have positive earnings, selling below book value and some have good analyst ratings.

    • 11441 |
      Travis Johnson, Stock Gumshoe
      Travis Johnson, Stock Gumshoe
      Jan 24 2019, 07:54:10 pm

      It’s good to have a firm valuation strategy, though it’s probably also tru that the Marlboro brand is worth far more than the value the balance sheet places on it.

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