It's Time To Sell This Controversial Stock

Nathan Slaughter's picture

Wednesday, May 1, 2019 - 2:30pm

by Nathan Slaughter

It's quite possibly the most controversial holding in the Daily Paycheck portfolio.

But it's not my job to pass judgment -- you're on your own for that. 

My job is to point my subscribers to the best opportunities for income and portfolio growth.

And after nine years (and currently paying a robust 5% yield), tobacco giant Altria (NYSE: MO) has done just that.

In fact, it's rewarded us with a gain of roughly 334% during this time. And while we make a habit of reinvesting our dividends as part of our strategy over at my premium newsletter, you can see how the stock's total return has absolutely crushed that of the S&P 500...

Altria stock chart

There's just one problem... Or, a few, in fact.

The company just posted soft first-quarter results that fell short of expectations on both the top and bottom lines. Revenues for the period dipped by 6% to $4.4 billion, while earnings dropped by a similar percentage to $0.90 per share.

While there were some extenuating inventory issues, they couldn't disguise the fact that domestic cigarette shipment volume plunged 14% from a year ago. Worse still for the company, Altria's market share slid below the 50% mark as more customers opted for discount brands.

Smoking rates have been falling for years. Altria has done a good job managing that headwind (there's something to be said for Marlboro's brand loyalty), but it's fighting an uphill battle. You can only offset falling volume with price hikes for so long.

At the same time, sales of smokeless tobacco rose 3% for the quarter, and wine revenues climbed 6%. But these are much smaller operations. Altria has also invested $1.8 billion in cannabinoid company Cronos (Nasdaq: CRON), becoming its largest stockholder. While that stake could yield big profits in time, management concedes that any near-term financial gains over the next year will be negligible.

The reality is that Atria's core cigarette sales volume has been cut in half since 2000 and remains a shrinking business. That secular trend will only accelerate if efforts to raise the legal smoking age to 21 (which Altria supports, by the way) are successful. This has put the company under pressure to make a bigger shift into smokeless products (which account for just 10% of sales). Investment in e-cigarette maker Juul could be the solution but ceding valuable retail shelf space might cannibalize sales of traditional cigarettes. Not only that, but the entire industry has come under fire for the teen-vaping epidemic.

Meanwhile, the debt incurred to make these investments has led to a sharp increase in interest expenses.

Action to Take 
MO has been very good to us over the years at Daily Paycheck -- and our 334% gain just goes to prove how lucrative it can be to find a well-run company that rewards shareholders handsomely and hold for the long haul. (Not to mention that our strategy of dividend reinvestment meant that our income from the stock kept getting bigger and bigger over the years.)

And while the generous dividend is on solid ground, there are too many potential negative catalysts for me at this point. That's why I recently advised my premium readers that I think the time has come to collect our gain and move on. 

P.S. On May 9th master trader Jim Fink is going to show a small group of regular investors how to turn $5,000 into $125,000. In the next 12 months. This free event starts at 1 p.m. sharp. And spots are limited. Click here for details.

Nathan Slaughter does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.