The rise of technology over the years rapidly speeds up the rate of innovation. From automobiles to logistics, biotech to healthcare, commerce to renewable energy, almost every industry in the world eventually gets disrupted, and legacy companies that can’t keep up get replaced. But there are two steady businesses that seem to be immune to change.
If you’re looking for durability, Altria Group (NYSE:MO) fits the mold. Altria was officially spun off in 2008 from Philip Morris, a company that traces its roots all the way back to 1847. Since that time, unsurprisingly, the business has undergone several mergers and changes, but the overwhelming driver has always been tobacco products.
Altria’s most popular cigarette brand, Marlboro, has maintained a leading market position over the years, with more than 40% market share in the cigarette industry. While Altria isn’t the only tobacco manufacturer in the world, competition is pretty slim. It’s hard enough to scale and grow a global manufacturing and distribution business, but with significant regulatory hurdles, it’s even tougher.
In 1971, cigarette ads were banned from television and radio. While this was designed to prohibit misinformation and the sale of cigarettes to youth, the inability to advertise new products has also inhibited competition. There are other regulatory hurdles, as well. Tobacco manufacturing requires licenses from various jurisdictions that aren’t too easy to obtain. Applying for a manufacturing permit entails thorough background checks and certain rules around production facilities. Without the proper licensing, businesses could face criminal charges. This intense regulation on tobacco is helpful in promoting consumer safety, but it certainly raises the barriers to entry for a would-be competitor.
When it comes to disruption, traditional cigarettes have seen little change over the years. However, e-cigarettes and vaping have grown in popularity as of late, and the argument could be made that this will be a threat to Altria’s legacy business. Since Altria recognized this threat early on and was well equipped with liquidity, it purchased a 35% stake in Juul in 2018. This investment has since been marked down 87% following health concerns. While this acquisition certainly looks poor in hindsight, Juul is still the leading e-cigarette brand, with a 42% market share. If tobacco consumption does transition to vaping, Altria would still be a beneficiary of the switch.
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There are very few businesses in the world that have as reliable a source of cash flow as Nelnet (NYSE:NNI). While the company has expanded its operations into various other endeavors over the years, its primary cash flow generator is its slowly dying loan book.
Starting in 1978, Nelnet helped students finance their education through the Federal Family Education Loan Program (FFELP). This program encouraged loan originators to lend to students by providing a federal guarantee of repayment. However, in 2010 this program was ended and Nelnet was no longer able to originate the loans, though it still claimed ownership to what was already lent. Today, Nelnet has more than $20 billion in outstanding loans and interest receivable, and according to Nelnet, between 97% and 98% of that money is backstopped by the federal government. Despite having a market cap of under $3 billion, Nelnet expects to recognize nearly $1.4 billion in cash flow over the next five years just from these outstanding loans.
With a guaranteed $1.4 billion coming in, shareholders should expect management to do what it has always done — reallocate capital efficiently. Since 2004, Nelnet has compounded book value per share by 17.3% annually with only a single down year. Nelnet’s been able to do this through a combination of different value-generating strategies. Nelnet can reinvest the cash into its operating businesses such as its loan servicing operation, education software platform, fiber-optic cable business, or even its newly chartered bank. Nelnet also has private investments, a share repurchase program, and a quarterly cash dividend, all of which could benefit from some incoming cash.
The only way this cash flow stream could be stopped is if the federal government defaulted on its promise. And as defaults by the United States government are quite rare, Nelnet’s income is extremely predictable and immune to disruption.
While Altria and Nelnet aren’t too exciting and will likely grow at a slower rate than most high-tech businesses, the consistency of each business should create a high margin of safety for investors.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.