Though consumers may hate monopolies, that word should be music to investors’ ears. Controlling a market by being the sole provider gives companies fat profit margins and a reliable future free of worrying about competitor moves.
Antitrust laws mean that monopolies are often illegal, and the feds have broken up ones like the old AT&T and Standard Oil, but there are still industries that allow many of the same benefits as traditional monopolies. Below are three high-yield stocks — Altria Group (NYSE:MO), Anheuser-Busch InBev (NYSE:BUD), and Verizon Communications (NYSE:VZ) — that have monopoly-like control of their respective industries.
Smoke ’em if you got ’em
Danny Vena (Altria Group): Tobacco might be the last thing you think of when it comes to monopolies, but consider some of these statistics for Altria Group, and you’ll be convinced. It’s the largest tobacco company in the U.S. and last year controlled more than 50% of the domestic market. Its flagship brand Marlboro is the leading tobacco brand in the country and in each of the 50 states, controlling 44% of the market.
You might think tobacco is a dying industry due to tough anti-smoking regulations, persistent lawsuits, and the declining rate of smoking, yet Altria doesn’t rely solely on the near-monopoly of its Marlboro brand. The company has been diversifying into e-cigarettes, smokeless tobacco, and alcohol to take up the slack. The company has a 10% stake in AB InBev, itself a virtual monopoly, with 45% share of the beer market in the U.S. Altria’s e-vapor division, Nu Mark, accounts for 55% of the vaping market, and that market is growing.
The company expects its earnings per share to grow in a range of 7.5% to 8.5% this year.
Altria has also increased its dividend every year since the spinoff of Philip Morris International (NYSE:PM) in 2008 — if you consider its previous incarnation, its record of climbing dividends amounts to 51 increases in 48 years. It recently increased that payout by 8.2% to $0.66, currently yielding 4.1%. A payout ratio of only 31% leaves plenty of room for future increases.
This one’s a smokin’ deal.
A brewing monopoly
Daniel Miller (Anheuser-Busch): What do consumers in South Africa, Western Europe, Mexico, China, Argentina, and America have in common? Probably a ton, but one thing for sure is that when they reach for a beer, there’s a good chance it’s from Anheuser-Busch InBev. AB InBev has incredible scale and efficient operations, and is arguably a near-monopoly with its wide range of global brands that include Budweiser, Becks, Michelob Ultra, Corona, and Stella Artois, among many others. AB InBev jumped closer to monopoly status when it acquired SABMiller and its list of billion-dollar brands jumped to 18, its market share in the U.S. hit roughly 45%. Its estimated share of global beer profits reaches about 46%, and it produces about 27% of the world’s beer — that’s ridiculous reach and scale.
Between creating synergies with its recent acquisition and focusing on premium beverage categories, AB InBev’s second-quarter EBITDA margin moved 238 basis points higher to 37.7%. Furthermore, according to Morningstar.com, proof of its scale and cost advantages show in its $33 EBITDA per hectolitre — a metric unit of capacity equal to 100 liters of beer, wine, or agricultural produce — in 2016 compared to the second-place company that generated only $23 per hectolitre. If you’re looking for a near-monopoly in today’s age, the size, scale, and profitability of Anheuser-Busch InBev is as close as investors can get, and with a dividend yield of 3.14%, it’s absolutely a stock worth considering.
Jeremy Bowman (Verizon Communications): Today’s telecom market may be more of an oligopoly than a monopoly, but Verizon Communications is probably the closest a large company can get to a monopoly in the U.S. these days.
The nation’s leading wireless service controls 35% of the market with nearly 150 million subscribers, and has been the most popular provider since wireless phone service overtook wireline. It has the biggest, farthest-reaching network, and only three significant competitors — AT&T, T-Mobile US, and Sprint.
In cable and internet, with its FiOS service, Verizon often competes in local duopolies where the only other service provider is Comcast or another cable company. Limited competition and virtual monopolies within those industries allow for steep pricing on equipment such as routers and set-top boxes as companies like Verizon often force customers to rent them from the provider rather than purchasing them on the open market.
Like other telecoms, Verizon is no slouch when it comes to paying dividends, either. The company offers a 4.7% yield, and it has steadily raised its payout every year since the recession.
Though the stock has underperformed the market over the last few years, that is likely to change if stocks pull back or the economy enters a recession. In those situations, investors tend to seek out defensive dividend payers like Verizon. With consolidation continuing in the telecom, broadband, and cable industry through mergers and acquisitions, market power and profit margins are only likely to increase for Verizon and its peers.
Daniel Miller has no position in any of the stocks mentioned. Danny Vena has the following options: long January 2019 $110 calls on Anheuser-Busch InBev NV and short December 2017 $125 calls on Anheuser-Busch InBev NV. Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Anheuser-Busch InBev NV and Verizon Communications. The Motley Fool recommends T-Mobile US. The Motley Fool has a disclosure policy.
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