Several subscribers recently asked why we exclude Altria (formerly Philip Morris) from our 4-for-18 High-Yield Dow Strategy. Its current yield of almost eight percent makes Altria the highest yielding of the 30 Dow stocks and it has consistently ranked among the “top four” highest yielding issues since March 1993, soon after the company lost its first major liability lawsuit concerning the health risks of tobacco.
The short answer is that stocks are bought to be sold. The strategy is not a buy-and-hold approach, but one that buys stocks low and sells them dear, as measured by their relative yield. During the past ten years investors would have ridden the stock up and down as the share price gyrated. They would have accumulated more shares on dips, but aside from a hefty dividend they never would have cashed in. The stock simply does not fit the profile of a typical high-yield Dow stock, and we continue to believe that if the stock was included in the model, the prospect of ever selling it at a profit would be slim.
Why does Altria not conform to the model? The other high-yield Dow stocks make the buy list because investors believe the firms face some inordinate risk resulting from a particular difficulty. More often than not they leave the list and are sold, but only because management overcomes the problem and the share price rebounds.
But the fate of Altria appears not to be in the hands of management; instead its future will be determined by trial lawyers and politicians. As our parent, AIER pointed out (Research Reports, “Smoke and Mirrors,” April 14, 2003), state and Federal governments now make more money from cigarettes than the tobacco companies do. The states are at least as addicted to cigarettes as most smokers are, having through litigation effectively imposed a $250-billion tax on tobacco to be received over the next 25 years. This comes on top of $8 billion garnered annually through excise taxes. The chief threat to this revenue source appears to be pending litigation by private parties and the Federal government. The most recent class action decision in Illinois pitted the plaintiffs against the attorneys general of several states.
Our decision to exclude Altria represents a rare case of asserting our judgment over the purely mathematical wisdom of the model. Such instances bear a steep burden of proof that in this case has been met. It appears that Altria’s share price will continue to fluctuate wildly in response to future litigation news, but it is likely to remain unsold in the top four until and unless it goes “feet first.” It has become, in effect, a junk bond, but without the promise of a redemption value.
Also in This Issue:
Quarterly Review of Investment Policy
Hedge Funds: Buyer Beware
The High-Yield Dow Investment Strategy
Recent Market Statistics
The Dow-Jones Industrials Ranked by Yield
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