Probably the World's Greatest Investment

I get frustrated when commentators point to a company and say, "Look, if you bought this stock 50 years ago, you'd be rich!" It's not just frustrating. It's often pointless.

But I'm going to do it anyway with Altria (NYSE: MO  ) . The returns are spectacular enough, and there are great lessons from its success that'll hopefully make it worth your time.

If you bought Altria (Philip Morris in another lifetime) in 1970 and reinvested all dividends, you would have made 155,300% on your investment. That's simply incredible. An investment in Warren Buffett's Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) compounded assets during the same period by 190,000% -- better than Altria, but annualized, it's not a major difference. A similar dividend-adjusted investment in the S&P 500 would have returned roughly 4,500%.

What's incredible about this is that Altria's success hasn't been on the back of anything close to innovation. Early investments in Microsoft (Nasdaq: MSFT  ) or Wal-Mart (NYSE: WMT  ) offered better returns for many years, but they achieved success either with life-changing technology or rapid-fire business growth. Altria makes roughly the same product it did over a hundred years ago, and smoking rates have actually been declining for decades.

So what explains Altria's incredible success? I think you can narrow it down to three points.

1. Really simple business
Evolution can be dangerous. How many technology companies that were huge in the '70s and '80s are still around today, let along dominant? Very few. Competition is ruthless. That dynamic makes technology investing really exciting, but can turn great companies into losers really quick.

Altria, and the cigarette industry in general, bypasses a lot of that risk. Grow tobacco. Roll. Sell. That's about it. It's how the industry operated 100 years ago, and I'm willing to bet it's how it'll operate 100 years from now.

The benefits of this are that (1) R&D expenses are kept at a minimum, and (2) you get really, really good at what you do. A company like Apple (Nasdaq: AAPL  ) that launches new products at least once a year has to organize new contractors, hire new engineers, develop new best practices, and constantly reshuffle its business to remain competitive. Each one of those steps is an invitation to screw up. By producing the same product today as it did decades ago, Altria gets to figure out how to operate as efficiently as possible, and that efficiency remains mostly permanent because its business doesn't change. It's specialization at its finest.

2. Allocation of capital
It's difficult to invest a ton of money in the cigarette business for the same reason described above: The industry doesn't change much. There's no innovation. Altria chugs out a ton of cash, and there isn't much management can do with that cash other than give it back to shareholders. So that's exactly what they do. Huge dividend payouts have been Altria's staple.

That brings me to the third point.

3. Consistently cheap share price
What seems like Altria's greatest fault is one of its secret weapons: Its share price has consistently remained in the dumps. Since the early '90s, shares have traded at an average P/E ratio of less than 12. That's pitiful.

There are a few reasons for this. One, the company isn't a fast-grower. Two, it's a "sin" stock, causing many investors to steer clear. Three, it's been under constant litigation threat, giving investors reason for caution.

But how has that benefited shareholders?

The consistently cheap stock price has made reinvesting dividends a bonanza. Simple math here: Cheap valuation equals high dividend yield. High yield equals lots of shares acquired upon reinvestment. More shares equal more dividends. More dividends equal more shares. Around and around you go. If you look at Altria's performance since 1970, non-dividend-adjusted returns are roughly 6,600%. That ain't bad, but it's a tiny fraction of the 155,000% return received when dividends are reinvested.

You've surely heard the maxim that "low valuations lead to superior long-term returns." Altria is probably the greatest example history provides.

Boring, simple business. Great capital allocation. Cheap valuations. These are three really basic concepts that have made Altria one of the best investments to own over the long term. I'm confident it'll continue to be the same for years to come.

Fool contributor Morgan Housel owns shares of Altria, Microsoft, and Berkshire Hathaway. Berkshire Hathaway, Microsoft, and Wal-Mart Stores are Motley Fool Inside Value recommendations. Apple and Berkshire Hathaway are Motley Fool Stock Advisor selections. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Altria Group, Apple, Berkshire Hathaway, Microsoft, and Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (21) | Recommend This Article (42)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 30, 2010, at 12:32 AM, binkenhiemer wrote:

    If you want to make money on a product that kills its consumer and costs EVERYONE else in a society in medical costs, then fine be an amoral monkey. Wait, not even monkeys would do that... Oh, and don't go on and on and on about how it is their free choice. Most of the "recruits" are children that exhibit risky behavior because of their brain structure and by the time they grow up enough to figure out that smoking is not good for them or anyone in their lives, it is wired into the prefrontal cortex as a permanent adiction. Investing in a company that makes a product that specifically kills people is not sound investing. It just the mark of a sociopath.

  • Report this Comment On October 30, 2010, at 11:32 AM, rwwww wrote:

    Well...ouch...Binkenhiemer seems like he got up on the wrong side of the bed.

    BTW...where were the parents of those "recruits"? I guess that they too abandoned their responsibility for raising their children?

    So...you don't like cigarettes? Then have the government BAN them. But...wait a minute the government (local, state and federal) earn 6x as much in profits on a pack as the companies do.

    Let's see we'd have to find another industry to replace that revenue, which is, #1 revenue resource for the government. So, who do you think that industry should be? How about FAST FOOD. They seem to be the same young Happy Meal recruits that you mentioned. FF is corrupting our youth BEFORE they know what a terrible thing FF is! (Have I heard that argument somewhere else?)

    Have a nice day...Binkenheimer.

  • Report this Comment On October 30, 2010, at 11:38 AM, rwwww wrote:

    I just figured out that the $12,800 I "invested" in 1976 in my new 1976 Porsche 912E just cost me $19,878,400. Man oh man...what a ride.

  • Report this Comment On October 30, 2010, at 11:40 AM, lctycoon wrote:

    I doubt that there is anybody in the USA that doesn't know that smoking is harmful by age 10. Schools constantly jam it down their throats and frankly, the parents should learn to raise their children. Altria does not sell cigarettes in any country except for the USA, so don't talk about the "third-world" or anything like that.

    What about PM though instead of Altria? The fact is, there's only so much you can do to become more efficient if your customer base is declining like Altria's. Whereas PM is growing.

  • Report this Comment On October 30, 2010, at 12:17 PM, rwwww wrote:

    "I doubt that there is anybody in the USA that doesn't know that smoking is harmful by age 10"

    Perhaps this is a SMALL part of why 5 consecutive juries in FL (Engle Progency Cases) have found in favor of MO.

    "The fact is, there's only so much you can do to become more efficient if your customer base is declining like Altria's. "

    Which is why MO is expanding into side business like snuff and cigars...perhaps one day they might be involved somehow in smoking products that are now considered illegal. And, take a look at the SIZE of the customer base versus the % decline in smoking. How many absolute smokers are there today versus 1950 when the smoking rates were double what they are today? You might be surprised.

  • Report this Comment On October 30, 2010, at 12:30 PM, rockbox64 wrote:

    What the hell? Stop crying about cigarettes. You don't like the company on principle, don't freakin buy it. It makes me laugh. As to the actual Altria business, for those who care about it as an investment, smoking in the US is going down every year. For this reason PM is by far the better play. It cuts a divvy AND grows.

  • Report this Comment On October 31, 2010, at 11:08 AM, tomd728 wrote:

    Awwww Binky !

    Anyone who owns MO is a sociopath ? Then that would include all owners of ETFs,Mutual Funds,

    Pension Funds etc. of those so short-sighted to

    buy a piece of MO in any form.

    We'll just have to get to work on these deranged

    individuals eh ? When that is done we'll chase down every self-righteous jackass who has deemed himself "holier than thou" through his own words.

    We better get busy Frances !!!!!!!!

    Tom

  • Report this Comment On November 01, 2010, at 12:01 AM, Beckielt wrote:

    Tobacco in whatever form cripples,maimes and/or kills. I am a respiratory therapist. One floor at the hospital where I work looks like halloween every day. Its the oncology floor where people with oral cancers wind up. Besides the obvious, cancer, emphysema and chronic obstructive disease it also causes or contributes to cardiovascular disease which, of course, can lead to stroke and heart attack. That being said, yeah, smokers do ramp up everyone's health care cost significantly. On the one hand, buying this stock seems like a great way to recoup my own insurance / healthcare cost and more; on the other hand...I wouldn't touch it with a 10 foot pole. Mr. Binkenheimer is absolutely right about the prefrontal cortex, and any kid with half a brain and any imagination can figure ways to get cigarettes with out parents knowing. I already make money off tobacco, I don't want anymore.

  • Report this Comment On November 01, 2010, at 10:14 AM, Metaworld wrote:

    Sounds like we're talking about a few different things here: tobacco, nicotine, and stock value. I question the absoluteness of tobacco crippling, maiming, and killing; I just can't believe it's a hundred percent. What I am hearing is that tobacco in any format is a terrible delivery device. It does not, however, hard wire the prefrontal cortex, nicotine does. So, is nicotine the problem? Any product with an addictive nature is bound to be successful, Ask Coca Cola. Wait, cocaine was actually bad for you, so they switched to caffeine, for "taste" I understand. It seems that a potential solution would be to develop a non-tobacco delivery system. Oh yea, that's been done by the pharmaceutical companies with their "cessation" products, which are actually primarily used as substitute products. Well, now that the FDA is involved, I am sure that America is in good hands and that the plant that has been around for thousands of years and helped build this country will finally be harnessed for only its good attributes. In the meantime, as Jim says, "buy, buy, buy!"

  • Report this Comment On November 01, 2010, at 3:59 PM, RavenManiac1968 wrote:

    legalize marijuana - that would be a huge profit generator and the gov't could tax the crap out of that too as well as let cops pursue real criminals instead of some stoned surfer looking to knosh on Doritos!!

  • Report this Comment On November 02, 2010, at 12:07 AM, Beckielt wrote:

    The prefrontal cortex comment was in reference to teens & young adults making poor choices due to a late maturation of that region (which is normal). People tend to get addicted at that stage. I will retract the word maimes; disfigures, cripples, and kills would have been more accurate.

  • Report this Comment On November 02, 2010, at 12:33 AM, starbucks4ever wrote:

    Remember that turkey that spent its last day thinking how life on the farm was beautiful?

  • Report this Comment On November 02, 2010, at 12:12 PM, Metaworld wrote:

    Sounds like we should all think like turkeys. Since we will all have a "last day," what a great attitude to have. It may also serve as a great investing attitude helping to quell the fear of "tomorrow's" pending market collapse.

  • Report this Comment On November 05, 2010, at 12:00 PM, thejatrain wrote:

    Yeah, I am not a fan of this article. "Grow tobacco. Roll. Sell." What about lie and litigate? Oh and aren't there a few chemicals in there with that tobacco? What other company that has followed the "really simple business" advice you advocate is alive today as it was 100 years ago? Say it's a great investment, that it's paid off over time, but don't try to fabricate these backwards-looking justifications. This seems to me like an article MF is just churning out to keep up the clicks...

  • Report this Comment On November 05, 2010, at 12:59 PM, gimponthego wrote:

    I invest/trade to make money. When I sit down at the computer, with my army of cats doing their appointed DD so I don't have to, morals aren't on any of our minds. There's smoking..their choice..gaming..their choice..and if you think for a nanosecond I'm going to give up my rather substantial position in LVS, you would be..mistaken.

    Ethics, on the other hand, are important to me and I can control mine. I can't go into the books of some companies and spend the time it would take to study the "gray" ares of some. MO? Great stock, if you're here to make money and take it seriously.

  • Report this Comment On November 05, 2010, at 4:21 PM, billdick6 wrote:

    I question how great is the medical cost of smoking. Many have large medical expense in their last year (and all will have a last year). Think how much less Social Security, on average, a smoker collects by dying a few years earlier.

  • Report this Comment On November 05, 2010, at 7:51 PM, rickpulsifer wrote:

    Ahh, that great debate - morality or money. Frankly, I am dead set against tobacco in all its forms (nothing like a reformed smoker!), but how do you turn a blind eye if you're investing to make a profit? You could balance it out by investing in something to assuage your guilt, like wind power, animal-free cosmetics, whatever. You could hold your nose and buy MO or PM. You could ignore the whole sector. You could give up your investments in Lockheed because they build weapons of war.

    I don't know how I'm going to answer this either, but am interested to see what other Fools have to say. Thanks!

  • Report this Comment On November 05, 2010, at 8:12 PM, billdick6 wrote:

    I question how great is the medical cost of smoking. Many have large medical expense in their last year (and all will have a last year). Think how much less Social Security, on average, a smoker collects by dying a few years earlier.

  • Report this Comment On November 05, 2010, at 8:39 PM, thommittag wrote:

    Altria has a major commitment to employee education. They require their staff to constantly improve technical and management skills. They're also smart enough to get out of industries they aren't expert in (e.g., Miller Beer and Kraft Foods).

  • Report this Comment On November 05, 2010, at 9:48 PM, mecikalskim wrote:

    Tobacco related diseases cause a lot of pain and suffering. There is really no difference between a tobacco farmer in the US and poppy growers in Afghanistan...they are both trying to make a living with a very profitable addictive crop that causes misery. They both need to stop. It is not a good idea to profit from a product that causes so much misery.... that said, I myself have owned funds that include tobacco stocks, because the funds have done well...I am trying to cut back on that tobacco stock addiction. None of us is perfect, of course, but the moral thing to do is not to own tobacco stocks...there is no other class of investment that produces such a deadly product in terms of loss of life in the whole world....no excuses...oppose tobacco use as much as you can stand, and work on opposing tobacco even more. M. Mecikalski, MD

  • Report this Comment On November 07, 2010, at 1:22 AM, ccubed333 wrote:

    I just read an article that says tobacco can be used as an outstanding natural pesticide. As the world sees the need to be greener every year this could mean new revenue sources for such a company.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1350866, ~/Articles/ArticleHandler.aspx, 10/1/2014 4:29:15 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement