The most notable of these brands is the Marlboro brand that alone represents 8.4% of the total global cigarette market in terms of volume. In the United States, Altria Group holds a 50% share of the tobacco market with a 60% share in the premium brand segment. I think this alone gives the company a significant competitive advantage over the company's two only major competitors in this market Reynolds American (NYSE:RAI) which has a 29% market share and Lorillard (NYSE:LO) which has a 10% market share. The remaining 11% is composed of deep discount manufacturers and small, specialty cigarette makers. Altria Group's two major rivals have a slight advantage in that Reynolds American produces more savings brands and benefits when some consumers' switch from premium brands to less expensive brands. Lorillard has the advantage that its Newport brand is the most popular brand of mentholated cigarettes. Most of Altria Group's brands are premium, making it more sensitive to substitution when discretionary spending is on the decline, in my opinion.
Altria Group pays out a dividend of $1.64 per share that works out to be around 5.5% as a dividend yield. This dividend is both paid out and raised on a consistent basis. The trailing twelve month payout ratio on the stock is however quite high coming in at 96%. (the highest percentage in relation to its pears) In my opinion, this does not leave the company with much room to raise it at the company's current earnings-- comparatively speaking. On the other hand, I think the company's cash flow is a strong indication that Altria Group's fundamentals are stable enough to carry the dividend payment through any revenue short fall in the short term and Altria Group is renowned for having a high dividend yield. The company's total cash on hand and invested in short term investments total almost $3.5 billion.
In the company's latest earnings release Altria Group reported profits that fell on a year over year basis but most of the company's metrics beat analysts' estimates. Net earnings fell 9% in the quarter to $836 million or $.41 per share from last year's $919 million or $.44 per share. However, adjusted earnings increased 13.6% to $.50 per share from $.44 per share in the year ago quarter-- analysts' estimates were for earnings per share of $.49. Revenues increased 5% to $4.3 billion and beat analysts' consensus estimate of $4.23 billion. Altria Group also gave guidance for this year in the report for adjusted earnings in a range of $2.17 to $2.23 per share, which is in line with analysts' estimates of earnings of $2.19 per share for the year. I think the company is continuing to generate revenue in spite of its political head winds and now that those winds are diminishing somewhat you may see some more earnings surprises going forward.
The government's latest escapade into the intrusion of our personal liberty, freedom of choice and speech, was overturned by United States District Judge Richard Leon in Washington. The Food and Drug Administration, in its congressionally delegated authority to write the law and endless wisdom, came up with a requirement that tobacco companies were to display graphic images on its products depicting the hazards of smoking. The images were to take up the top 50% of the packaging, front and back, and include a number for a stop-smoking hotline. (I'm not going to tell you what the images are you have to read it for yourself to believe it.) The Food and Drug Administration retorted after the decision, that the public interest in conveying the dangers of smoking outweighs the companies' free speech rights. (Does anyone remember "We will read the Health Care Bill after we pass it"?)
This represents a victory for the tobacco industry, in my opinion, and also shows how the aristocratic administrations view the public's constitutional rights in general. The really scary part is this is the agency that is supposed to have the intellectual capacity to regulate prescription drugs, in my opinion. On the flip side at least the Judicial Branch of government is correcting this abuse of power and the tobacco companies are not the easy target of litigation they once were. The government is also underestimating the growing intelligence of the general public and the public's ability to know when they are being coddled to. This growing awareness, at a younger and younger age, of the governments past propaganda programs and in essence brainwashing techniques, will eventually require our representatives to actually read and write the bills they are passing. In my opinion, this will start forming the type of government our forefathers envisioned.
With Altria Group's legal victories, high dividend yield and solid fundamentals the company looks quite attractive at this price level. The company's diversification of its product line and more importantly its geographical diversification also add to the stocks appeal. Altria Group would be a good addition to any portfolio as a relatively safe income stock with the potential for capital appreciation.
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