Pick of the Week: When Tobacco is a Good Thing (MO)

Investing can be a complicated affair. You’ve probably become painfully aware of volatility issues in the market. But there are other factors to consider too. You’re not simply buying a company believing it will rise over time. Sometimes you’re buying an idea you believe in. For instance, you may like alternative energy for reasons that transcend profit margins. Your philosophy can direct your investing.

Market commentators have termed this type of investing ‘socially responsible’. Not surprising, groups do not agree what companies should be deemed socially responsible. Most suggest gambling, alcohol, and weapons companies should be excluded from this label, while others disagree. Investor consensus is lacking in this area.

So why do we bring up socially responsible investing in our Pick of the Week? Because this week, we are recommending Altria Group (MO). Altria is the parent company of Philip Morris, an American tobacco company and also a partial owner of SABMiller, one of the world’s largest beer brewers. We think there are reasons to consider owning Altria Group. If it lines up with your investing philosophy, then read on.

Reason #1 to Own Altria:
It’s an Evergreen Company

Altria grows and sells tobacco products across the globe. Like it or not, tobacco buyers are some of the best repeat buyers. If someone smokes, they’ll do almost anything to get their next pack of cigarettes. Tobacco users could be unemployed or unable to make rent, but they’ll usually find money for their tobacco. Moreover, as they expand in the third world, their profits should grow while legal risks would be minimal. With 15 billion cigarettes sold every day to repeat customers, Altria runs an almost-recession proof business. This is good news for stockholders.

Reason #2 to Own Altria:
It’s in a Buying Mood

In this market, you want to own strong companies, not distressed ones. The fact that Altria is buying UST for $10.3 billion demonstrates their confidence in their long-term success. Dow Jones Newswires reported lenders slowing this acquisition because of credit issues, but the deal should still go through. Regardless of when it happens, Altria stands a better chance at consolidating their position in their market, especially in the smokeless arena.

Reason #3 to Own Altria:
Looks like a Strong Company in a Weak Market

Some companies appear weak because of older management or technology. Altria does not appear to suffer from this problem. As mentioned before, they’re looking forward with their latest acquisition. Secondly, they’re showing an interest in effective management by spinning off Philip Morris International in March. Finally, Barclays expects solid gains for Altria in the 3rd quarter because of currency adjustments, market share, and pricing. In addition, Altria is paying out a 6.6% dividend – a huge benefit to investors. In short, Altria looks like a strong company in a weak market.

Every business has its risks. In Altria’s case, there are legal risks with this pick. Altria is always open to more litigation because of their business. However, we think most of that risk is priced in. The fundamentals are driving our pick. Consumer staples, especially consumer ‘vices’, are a compelling option in this volatile market. If all else fails, people will still go to Wal-Mart and buy their Marlboros. For a politically-incorrect pick in a fluctuating market, go with Altria Group (MO).

All the best.

Note:
Keep in mind, the Pick of the Week is usually intended for aggressive investors. Don’t risk money you can’t afford to lose. You will need to decide when (and if) it is time to sell.