Altria Group (NYSE:MO) is engaged in the manufacture and sale of cigarettes and certain smokeless products in the U.S. With 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. UST provides Altria with the leading smokeless tobacco brands, Skoal and Copenhagen. The company's diversification into smokeless tobacco is crucial to promoting its growth due to the declining market for smokers in the U.S.
Altria, whose brands include top-selling Marlboro cigarettes, Skoal smokeless tobacco and Black & Mild cigars, also reaffirmed its 2013 full-year adjusted earnings forecast of between $2.35 and $2.41 per share. The company also owns a wine business, holds a voting stake in brewer SABMiller, and has a financial services division.
Philip Morris USA (PM USA) is Altria's domestic cigarette manufacturing company. Philip Morris remains the largest tobacco company in the U.S. by both revenue and volume.
Altria has been a huge winner over the past half-century, having survived countless regulatory threats, lawsuits, and public campaigns to reduce tobacco use and cut into its core business. Even though cigarette smoking has become less popular over that span, Altria and its peers have managed to keep profiting from the industry.
Financials and Growth Story
Altria Group Inc. is launching its first electronic cigarette under the MarkTen brand in Indiana starting in August and expanding its smokeless product offerings. It is diversifying beyond the traditional cigarette business, which has become tougher in the face of tax hikes, smoking bans, health concerns and social stigma. MarkTen is a disposable e-cigarette but can be reused by buying a separate battery recharging kit and additional cartridges in both tobacco and menthol flavours. The company said the e-cigarette's "Four Draw" technology is designed to give users a "more consistent experience" that closely resembles the draw of a traditional cigarette. Like other tobacco companies, Altria also is focusing on cigarette alternatives for future sales growth because the decline in cigarette smoking is expected to continue.
The company boasts of a strong product portfolio including its flagship brand Marlboro which approximately makes up to 85% to 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 an average in the coming five years.
Altria has increased its dividend for the last 44 years.
The diversity of Altria’s tobacco businesses and the successful execution of their strategies helped Altria earn approximately 52% of the combined tobacco profit pool in 2012. Altria Client Services entered into an agreement with Okono, an affiliate of the Danish company Fertin Pharma to develop innovative, non-combustible nicotine-containing products. Okono and another Altria subsidiary also formed a joint venture, Richmark, to market and sell these kinds of products outside the U.S. and Canada.
The company's growing earnings have also kept its dividend well covered and given it cash to burn on research into new and promising products such as e-cigarettes. Forecasts for future bottom-line growth have reassured many industry analysts that Altria's share price can still climb further in 2014.
Altria not only pays out generous dividends, it has an unusually high payout ratio. Its dividend has climbed 50% over the last five years. Dividend growth is important in this era of rising interest rates, and Altria's 5.2% dividend yield is among the best for moderate-risk stocks.
Entry into E-Cigarette Market
Philip Morris is planning to enter into the e-cigarette market in the second half of 2014. According to Philip Morris International CEO André Calantzopoulos, Philip Morris would attempt to absolve some of the current issues with the development of its own e-cigarette technology. The company noted that there is strong consumer demand for a less-harmful cigarette alternative, and that through positive results in its own consumer tests as well as broader consumer interest, Philip Morris would begin the development of its own e-cigarette. However, the company did note that current e-cigarettes often have a slower delivery of nicotine when compared to conventional cigarettes, and often have weaker tastes, which result in "limited user satisfaction and reduced adoption rates."
On an Acquisition Spree
Philip Morris is planning to acquire a 49% stake in United Arab Emirates-based Arab Investors-TA (FZC), which will give it a bigger stake in the Algerian market. Through the acquisition, Philip Morris will own 25% of the STAEM joint venture in Algeria, with which it has had a partnership with since 2005. It is expected that the investment will give a boost to Philip Morris' earning potential in Algeria, and noted this will be reflected in earnings per share results beginning in 2014. In May of this year, Philip Morris also acquired the final 20% interest in its Mexican subsidiary for $700 million.
Altria has a reputation as an income investor's staple. It has been inculcating in 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 continues to show great potential and still has several relative advantages over its competitors, including its dominance in cigarette market share, high dividend yield and diversification with other assets.
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.