One of the truly lucrative opportunities—and you only have to get it right once or twice to permanently change your life—that faced investors in the past five years was the opportunity to buy the incredibly stellar cash-generating asset The Altria Group, Inc. for fire sale prices.

A lot of things came together to put Altria on sale in 2009. Obviously, that was the year of the deepest panic selling from the financial crisis, giving you a chance to do well if you bought any company that has survived over these past five years. But you also had the fact that Altria had recently spun-off Philip Morris International and Kraft (which had also split into what is now Kraft and Mondelez), and a lot of investors didn’t know what would be left standing when it was just a domestic cigarette manufacturer (after losing its most lucrative, fast-growth asset in Philip Morris International and also parting with its most stable asset in Kraft, the uncertainty was justified).

There was a political angle was well—a lot of people thought the newly elected Obama administration was going to pass regulations aimed at delivering death blows to tobacco, rather than the bruises and gut punches that had been typical of previous administrations (of course, taxes from tobacco sources are an important part of every state’s budget, and if the vice were to ever disappear, states already struggling to make ends meet would find themselves would face the prospect of higher taxes and/or cut services).

Those factors came together to create a twice in a generation opportunity: Altria was trading at between $14 and $20 per share (the other time Altria got this cheap, as an FYI, came in 1999 when the intensity of tobacco legislation led many to wonder whether bankruptcy was in the cards).

Picking a middle point in 2009 of $17 per share—I wanted to investigate what would happen if someone had chosen to make a hefty commitment to Altria stock at that point in time.

Here’s what would have happened to a 1,000 share ($17,000 total investment). Most people that just look at stock charts will notice the increase to $42 per share and think that investors did quite all-right for themselves, turning $17,000 into $42,000 in a five-year timespan. But you’re much smarter than that.

You know that, to many people, Altria is simply the dividend stock because it is just about the only company in the world that consistently offers a high starting yield and a high dividend growth rate.

Even as a standalone company without the growth of Philip Morris International to propel it forward, Altria delivered the goods: investors collected $1.32 for each share they owned in 2009, $1.46 for each share they owned in 2010, $1.58 for each share in 2011, $1.70 in 2012, $1.84 in 2013, and at least $1.92 in 2014.

That’s huge.

Each share, without assuming any kind of reinvestment, has produced $9.82 in total dividend income per share. That’s nice if you are concerned about the long-term effects of taxes and regulations reaching a point where they inflict mortal wounds on the business model. Just by collecting cash—you’re only out 43% of your initial investment if the company disappeared tomorrow. Ten years of dividends dutifully collected and deployed elsewhere is a cash-back guarantee that lets you play both sides of the fence.

And, if you chose to stick it out and reinvest, the results are staggering. Each dividend would have gotten reinvested at an average price of $28.76. In a 1,000 share investment, the back-of-the-envelope figure looks like this: $9,820 in total dividend income that automatically created 341 additional shares of Altria.

The 1,000 shares generating $1,320 in 2009 dividend income would find themselves with 1,341 shares producing $2,574 each year (not to mention the fact that those 341 shares would currently be capitalized currently at around $42 for $14,322 in value if you needed to sell. In other words, the shares created by the dividend income alone are almost worth the entirety of your initial investment just five years later).

The other appeal of owning Altria in particular is that it has a 27.0% stake in SABMiller, sitting their quietly, pumping out its own significant dividends to Altria. I wonder what will become of it: Will it get spun off? Will SABMiller actually merge with Anheuser-Busch someday, giving Altria a huge cash infusion that would get paid out in the form of a special dividend? My guess is that the SABMiller stake is a huge source of hidden value that will create some significant wealth for shareholders somewhere down the line.

I think the most intelligent approach to Altria is something like this: you establish a base position, you reinvest for a couple years to accelerate your income growth due to growing and reinvested dividends, and then start collecting the dividends at some point to make new investments as a risk hedge against political regulations that are worse than anticipated.

I’m not entirely sure that a retirement wants to escalate their commitment to the tobacco industry, given the uncertainty of political regulations, as they near retirement by continuing to reinvest or add new shares. But I do think Altria is a nice cash cow, that if it becomes 3-6% of your overall wealth, can regular give you cash to do other things. In a mildly optimistic scenario, you could spend decades cashing dividend checks from Altria that are used to grow positions in Coca-Cola, Colgate-Palmolive, Nestle, Exxon, Pepsi, Johnson & Johnson, and Procter & Gamble. If given enough time, Altria could almost create a little blue-chip portfolio all of its own for you just from the dividends alone.

Originally posted 2014-08-18 08:00:03.

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