Down 25% year to date, the S&P 500 is in a tailspin, and the problem could worsen because of persistently high inflation and Federal Reserve interest-rate hikes, which could pressure economic growth. Defensive stocks like Altria Group (MO -0.37%) could help investors hedge their portfolios against these challenges.
Let's explore some reasons behind this.
A recession-resistant industry
According to a Bloomberg survey conducted in October, 60% of polled economists believe the U.S. economy will enter a recession within the next year due to rising interest rates and inflation.
Economic slowdowns generally mean less consumer spending -- but as a habit-forming product, tobacco is largely shielded from this headwind. Consumers will still need a nicotine fix, even during challenging economic conditions. For Altria investors, this means revenue and profit stability.
That said, Altria is a mature business (its original marque, Phillip Morris & Company, was founded in 1847), so investors shouldn't expect breakneck growth. Second-quarter net revenue fell 5.7% to $6.54 billion -- due in part to the divestment of its wine business, Ste. Michelle Wine Estates, for $1.2 billion last year.
Nevertheless, Altria has remained resilient to macroeconomic shocks, with management claiming that high inflation and Russia's invasion of Ukraine had little impact on its operations.
What are Altria's challenges?
Despite operating in the relatively buoyant tobacco industry, Altria isn't without its challenges, particularly from government regulation. This headwind has manifested as a crackdown on vaporizer maker Juul Labs, which Altria purchased a 35% stake in for $12.8 billion in 2018.
In July, the FDA banned Juul e-cigarettes in the U.S. market because of a lack of "sufficient evidence regarding the toxicological profile of the products." And while the decision is currently on hold pending more data, it is the latest in a series of write-downs for Altria's disastrous investment.
Image source: Getty Images.
In the second quarter, Altria recorded a $1.2 billion noncash loss related to the decrease in the estimated value of its stake in Juul. But with the remaining equity now worth just $450 million (a decline of 96% from the purchase price), this story has a silver lining.
With Altria's Juul stake so deeply impaired, the company is now mostly free of the uncertainty related to its exposure, meaning investors don't have to worry about this issue posing much of a risk to the stock going forward.
Further, Altria will have the option to release itself from noncompete obligations if Juul is prohibited from selling its products for at least 12 months. This could open the door for Altria to use its considerable branding and manufacturing capabilities to capture market share in the potentially lucrative e-cigarette market.
Focus on the bottom line
Management expects Altria's earnings to grow between 4% and 7% to $4.79 and $4.93 in full-year 2022. And the company boasts an annualized dividend of $3.60 per share, representing a yield of 8% at the current price.
While top-line growth is modest, the company's consistent profitability, massive dividend, and reduced Juul-related uncertainty make it a buy for investors who want a safe stock in this bear market.
