Altria Group Inc. (MO) is engaged in the manufacture and sale of cigarettes, and certain smokeless products in the U.S. With a 50% market share in the U.S. tobacco industry, the company dominates the market. Altria owns UST, the world's largest moist smokeless tobacco manufacturer by sales.
Altria’s strengths include a more diverse business model among U.S. tobacco peers, leading premium tobacco brands, a systematic approach to innovation, including new products, well-developed capabilities to address legislation, regulation and litigation challenges, proven cost management, and a strong balance sheet that supports excellent cash returns to shareholders, primarily through dividends.
Performance So Far
Last year, 2013, was a solid year for Altria. Altria has gained 28%, matching the broader market. Altria has provided the consistent dividend growth that investors have come to expect. It has increased its dividend for the last 44 years. The dividend growth rate was about 11.4% for the last decade. For Altria to have a successful 2014, it needs to keep looking for ways to cut costs while hopefully growing business in key areas like electronic cigarettes.
Recently, Altria has experienced an EPS CAGR of more than 20% over the last five quarters. It recently announced a diluted EPS of $0.7 during its last quarter.
Marching Towards a Better Future
Altria's dominant market share gives it pricing power and competitive advantages over its competitors Lorillard (LO) and Reynolds American (RAI), that aren't likely to go anywhere in the near future. Growth might not be as strong as investors would like, but absent an unlikely complete ban on tobacco, Altria's prospects in 2014 still look bright.
The company boasts of a strong product portfolio including its flagship brand Marlboro which approximately makes up to 85% in total cigarette volume sales of the company. With impressive top and bottom-line growth of 6% and 7%, respectively, on average in the recent five years, it is expected that there will be growth rate of 7.5% on average in the coming five years. Altria's Black & Mild cigars hold 30% of the retail market, and its Copenhagen and Skoal chewing tobacco together control 51% of the U.S. smokeless product market.
The company made significant progress in 2012 by conforming to cost reduction programs. It engaged itself in reducing headcount, consolidating certain facilities, improving business processes and pursuing other savings. Altria recorded net pre-tax restructuring charges totaling $271 million related to the current cost reduction program over the past five quarters, including net restructuring charges of $7 million in the fourth quarter of 2012. Altria has recorded substantially all the net pre-tax restructuring charges related to this program.
Altria’s tobacco companies are well-positioned in the U.S. tobacco space. They have the leading positions in the largest and most profitable tobacco product categories. And in each of these categories, Altria competes with premium brands that enjoy strong equity and higher margins than most of their competitors. For decades, the company has pumped out steady profit growth, and returned a great deal to shareholders.
Altria has a reputation as an income investor's staple. It has been inculcating shareholder-friendly policies, and is expected to provide value for investors. It has a record of healthy operating cash flows. The venture of the company into e-cigarettes will support growth in the near future.
Altria tries to manage the price gap between value and premium cigarettes by keeping their wholesale prices at a level high enough to be profitable but not so high that consumers start switching to value brands. Cost-conscious consumers may stop smoking or downgrade to a value-priced brand during economic slumps, but most consume the same brands at the same, or slightly lower, level. As a result, Altria and other similar companies generally experience less of a decrease in revenues during recessions than the economy as a whole. Therefore, in my opinion, this tobacco stock will continue to provide increased returns to its valued investors, and I am quite bullish about this company.