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
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
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
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
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.