Heading into the election, there were four U.S. states — Alaska, Colorado, Oregon and Washington, along with Washington, D.C. — that had already legalized recreational marijuana.
A fundamental shift in public opinion appears to be taking place on the issue of marijuana. Proponents advocate for legal sales, which could potentially generate billions of dollars of much-needed tax revenue for U.S. states.
Marijuana Stocks: A Risky Bunch
There are a myriad of marijuana penny stocks to choose from, but these can be extremely risky for investors. Penny stocks are notoriously illiquid, and many have questionable business models.
In preparation of what could be the booming industry of the next decade and beyond, investors should instead consider Altria Group (NYSE:MO) to be the best “marijuana stock” to buy for legalized marijuana.
Altria’s Already Equipped
Altria sells the Marlboro brand in the U.S and manufactures a number of smokeless tobacco products. It also has cigar and wine businesses.
The reason that Altria is the obvious choice to invest in legal marijuana is because the company is best-equipped to take a significant lead in the marijuana category.
Manufacturing smokeable marijuana products would be almost identical to production of cigarettes. Altria has an immense production and distribution network. Marijuana would fit in seamlessly.
Altria already has a universally-recognized brand. It has valuable shelf space at retailers across the country, and could easily position Marlboro marijuana products right next to cigarettes.
Shifting into marijuana production would carry some necessary level of investment. But again, no company is better positioned than Altria. It has massive financial resources at its disposal.
Altria has low capital expenditure requirements each year, due to the benefits of scale. Moreover, the company spends virtually nothing on tobacco advertising, since it is banned from doing so.
This keeps costs down, which results in very high returns on invested capital each year. In 2015, Altria generated $5.8 billion of operating cash flow and spent just $229 million in capital expenditures. This translated into $5.6 billion of free cash flow.
Altria has very deep pockets. It generates more than enough cash flow to invest significantly in marijuana, if the opportunity presents itself.
Hurdles to Legalized Marijuana
It is easy to get excited about the potential for Altria. Early results from states that were among the first to legalize marijuana for recreational use are promising. For example, in the fiscal year ending June 30, Colorado collected almost $70 million in marijuana-related tax revenue.
That was nearly double the total from alcohol-related tax revenue in the same time.
But there are still hurdles keeping Altria from its next great revenue stream. First, is that marijuana is still illegal under federal laws. This is preventing American businesses, such as Altria but also banks, from having anything to do with marijuana.
As a result, the extent to which Altria can benefit from marijuana remains cloudy, and depends largely on policy moving forward. This growth catalyst could be huge for Altria, but it could also take time.
Altria: First Among Marijuana Stocks?
To keep growing its dividend over the next several decades, Altria could use a boost. Smoking rates are on the decline in the U.S., which means marijuana is exactly the growth catalyst Altria has been looking for.
The outlook for the marijuana industry is a bit hazy and the right marijuana stocks have not yet emerged. But if regulatory and legal issues are eventually resolved, expect Altria to be the biggest beneficiary of the changes.
Altria shares were unchanged in premarket trading Friday. Year-to-date, MO has gained 12.28%, which is a slightly better return than the S&P 500 during the same period.
This article is brought to you courtesy of Wyatt Investment Research.