Who doesn’t love a refreshing cigarette? The mild satisfaction, the rich smooth flavor…so what if they come with the risk of emphysema and lung cancer? The tradeoff is worth it to tens of millions of smokers who patronize Altria Group Inc. (MO) and enjoy its variety of brands every day.
Altria (as in “altitude”) is the name the former Philip Morris Companies rebranded itself with in the early 2000s, in an effort to disassociate itself from the cigarettes that made the corporation a global icon. Today Altria maintains some of the world’s largest tobacco brands, with subsidiaries including U.S. Smokeless Tobacco, the world’s largest producer of the “moist” (their word) variety; John Middleton, which specializes in cigars and pipes; and Nu Mark, which makes e-cigarettes and discs, the latter of which appear to be some sort of candied tobacco chewable crafted for the nonconforming nicotine addict. Incidentally, Altria also owns 27% of SABMiller, the London-based parent of Miller Brewing, not to mention 100% of the Chateau Ste. Michelle winery. If it can compromise your liver, your brain cells, or your respiratory system, chances are good that Altria profits off it. (For more, see: More Bad News for Altria: Regulators Attack E-Cigs.)
Unconventional tobacco delivery systems might have their place, but 90% of Altria’s revenue still comes from good old-fashioned coffin nails. The company’s most important subsidiary by far is Philip Morris USA, the nation’s dominant cigarette maker. First, a nomenclature lesson: Philip Morris USA is a relatively new company, named after Altria’s previous corporate name. Yet neither Philip Morris USA nor Altria has any official connection to Philip Morris International Inc. (PM), which is the huge multinational that was spun off in 2008 to sell cigarettes outside the United States (and avoid domestic litigation). (For more, see: How Philip Morris International Lights Up Portfolios.)
Philip Morris USA makes Marlboros, which are perennially the nation’s best-selling cigarettes. If you’re a non-smoker, you might assume that price or some other criterion should logically be the most important criterion for buying a pack. But that’s not how smoking works. For those who indulge, brand recognition is so important that tried and tested Marlboro has an almost incomprehensible 44% market share in the United States. This for a product that’s easy to duplicate by the billions. Add a few more percentage points from Marlboro’s sister brands (e.g. Chesterfield, Virginia Slims, Basic, Parliament), and it turns out that most of the cigarettes sold in this country are manufactured by Philip Morris USA, and ultimately Altria.
America might be getting more obese, but most of the other consumption indicators are heading in the healthy direction. We drink less than we used to, and as a nation our lungs are as pink as they’ve ever been. About one in six adults smoke, compared to one in two a couple of generations ago. By rights, Altria’s tobacco operations should be taking in less money as the company’s clientele dwindles and dies off. Yet the revenue numbers are supremely consistent from year to year. (For more, see: Still Addicted to Dividends? Satisfy Your Craving With Tobacco Stocks.)
The reason is simple. Cigarettes are among the least price-elastic goods in existence, meaning that as they get more expensive, the quantity sold doesn’t drop by as much as the price increases. Smokers often grumble about rising prices, as they should: every pack sold has to account for the costs of lawsuits past and present, multi-billion dollar settlements, and other litigative obligations. But as high as prices have risen, they haven’t risen enough to change behavior on a large scale. People who want their fix, want their fix. And rather than run the risk of spending less on smuggled cigarettes instead, law-abiding smokers will continue to pay through the nose. Altria sold over half a trillion cigarettes in the United States last year. (For more, see: Biggest Tobacco Lawsuits.)
No legal product is as regulated, as proscribed, as taboo as the unassuming cigarette. And with good reason — whether it’s the unpleasant aroma that innocent bystanders can’t avoid, or the fatal diseases courted with every inhalation, cigarettes do far more objective harm than good. But as economic entities, they’re stupendously profitable. A cigarette costs less than 4¢ to make, and in some jurisdictions — New York City, for instance — can sell for as much as 70¢. Granted, 34¢ of that goes to taxes, but what remains is a markup that other industries can only fantasize about.
The Bottom Line
Other corporations’ public relations departments love to drone on and on about their commitment to the environment and other non-economic concerns — look at these diversity objectives we furthered, here are all the carbon offsets we spent our shareholders’ money on last year, etc. Yet sitting among those companies on the Standard & Poor's 500 is one whose products, it bears mentioning yet again, kill their users when used as directed. Altria is thus a monument to human contrariety, through which customers willingly and happily purchase the tools of their illness and demise. Still, one can only sit back and marvel at Altria’s proven ability to offer welcome returns to its shareholders, year in and year out. For investors more interested in returns than in public health, Altria remains one of the most attractive buying opportunities on Wall Street. (For more, see: Altria Could Be the Big Winner in This FTC Move.)