The market recently tumbled on concerns about President Trump's plans to hit China with $60 billion in tariffs on imports. China then retaliated with $3 billion in planned tariffs on American steel, pork, fruit, wine, and other products -- stoking fears of a trade war.
It's tempting to sell your stocks into this downturn, but nobody ever profited by panicking. Instead, investors should consider buying companies that are well insulated from potential trade clashes between the U.S. and China. The first company which comes to my mind is Altria (MO +0.37%), the biggest tobacco maker in America.
Image source: Altria Group.
Why Altria is a solid defensive play
Altria's best known brand is Marlboro, which controlled 43% of the domestic cigarette market last year. Its Copenhagen and Skoal brands controlled 50% of the moist snuff market, while its MarkTen brand held 12.5% of the retail market for e-cigarettes. It also sells Ste. Michelle wine and holds a major stake in beverage giant Anheuser-Busch InBev (BUD +0.75%) through the sale of its stake in brewery SABMiller in late 2016.
Altria has generated nearly all of its revenue from the United States ever since it spun off its overseas operations as Philip Morris International (PM +0.49%) in 2008. Altria is therefore insulated from any concerns about trade wars, the softness of certain overseas markets, and currency fluctuations.
The bears vs. the bulls
The bears are likely to note that U.S. adult smoking rates declined from 42.4% to 15.5% between 1965 and 2016, according to the Centers for Disease Control. Therefore, Altria's core market is shrinking, and its non-tobacco businesses, including e-cigarettes and wine, don't generate enough revenue to offset those declines. Moreover, the FDA plans to pass new regulations that would force tobacco companies to reduce their nicotine content to a "minimally or non-addictive" levels.
However, Altria has consistently raised its cigarette prices to offset shipment declines. The average price for a pack of cigarettes across all 50 states is just $5.51, according to Fair Reporters, which is much lower than in other countries. In Australia and Norway, for example, a single pack costs $15 to $16. High excise taxes in certain states -- such as New York, where a pack costs about $13 -- remain a tough headwind, but Altria still has plenty of room to raise prices across the country to offset lower smoking rates.
But that's not all. Altria also consistently cuts costs and repurchases its stock to boost its earnings amid stagnant sales growth. That's why analysts expect its revenue to rise just 1% this year, but for its earnings to climb 17%.
That's a solid growth rate for a stock that trades at just 15 times forward earnings. Philip Morris International, by comparison, has a higher forward P/E of 19. Altria also pays a hefty forward dividend yield of 4.6%, and it's raised that payout every year since its split with PMI.
As for the FDA's proposed regulations, they won't take effect for several years. The trade war fears will probably have waned by then. Moreover, if Altria lowers the nicotine content in its cigarettes, it could potentially boost its margin to offset its slower shipments.
Takeover potential
The bears will also cite British American Tobacco's (BTI +0.72%) takeover of Reynolds American, Altria's top domestic rival, as a major competitive threat. However, I don't think BAT's support will help Reynolds' top brands -- including Camel, Newport, Pall Mall, and Natural American Spirit -- overtake Marlboro in the U.S. market.
Smokers are generally loyal to their brands, and tobacco marketing is tightly restricted in the United States. Therefore, an influx of cash for Reynolds won't help it overtake Altria. Instead, BAT's takeover of Reynolds is probably aimed at bringing Reynolds' brands to more overseas markets to challenge PMI.
That's why many analysts believe PMI will buy Altria to recombine the two halves of the Philip Morris empire. Wells Fargo analyst Bonnie Herzog expects the buyout to occur at "up to" $77 per share -- which would represent a nearly 30% premium from its current price.
The bottom line
I'm not saying Altria is a buy-and-hold forever stock. But the tobacco giant's balancing act has worked well over the past decade, and it still has room to run before declining smoking rates and tighter regulations throttle its growth. When the smoke clears, I believe Altria will be a solid safe-haven stock for dodging the tariff clashes between the U.S. and its trading partners.
