Altria Group (MO, Financial) 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.
Performance Analysis
Altria manages product pricing to offset the low single digit decline in sales. Marlboro's brand loyalty allows Altria to steadily increase prices. The net price of a pack of Marlboro has increased from $4.27 in 2009 to the current $5.86. So while cigarette use declined by approximately 23% over the last five years, cigarette prices increased by approximately 37%. The Marlboro premium price is 35% higher than the lowest-priced brand.
Earnings per share increased from $1.48 in 2008 to $2.26 by 2013. The company expects to earn $2.57/share by 2014 and $2.76/share by 2015.
Currently, this dividend champion sells for 16.10 times earnings, yields 5.30%, and has a high payout ratio. Given the economics of the business, and the expectation for future earnings growth in the mid single digits, I find it attractively valued today.
Altria's plan to keep revenue and earnings per share going in the right direction is fairly straightforward: Keep expenses down and prices going up. Remember that tobacco companies are essentially banned from advertising. And, due to the low manufacturing costs inherent in the production of cigarettes, it's fairly easy for Altria to keep a lid on expenses.
The growth potential of the electronic-cigarette industry as well as Altria's flagship Marlboro and other brands gave management confidence to reiterate its 2014 forecast of generating approximately 8% earnings growth. This would fall right in-line with the company's long-term target of 7%-9% earnings growth and allow Altria to continue increasing its dividend.
Altria has a very transparent dividend policy. The company pledges to distribute approximately 80% of its diluted earnings to investors via its dividend. Therefore, it's reasonable to forecast around 8% annual dividend growth over the long term, which is about what Altria has delivered over the past several years.
Investors are also encouraged by the company’s attempt to strengthen its presence in the growing e-cigarette category. In April, 2014 Altria’s subsidiary Nu Mark LLC acquired the e-vapor business of Green Smoke Inc. and its affiliates.
The acquisition is a strategic fit for Altria’s e-cigarette business. Moreover, the expertise, experience, supply chain, product lines and customer service of Green Smoke are expected to strengthen Altria’s presence in the category.
Machine-Made Cigars
Altria competes in the machine-made cigar category with the Middleton brand. Recent competition from cheaper foreign machine-made cigars has reduced Middleton's retail share from 31.7% in 2009 to the current 29.4% share. Altria has focused on growing income from the cigar business by controlling costs while maintaining margins.
The smokeable products category (cigarettes and cigars) has grown income at a compounded annual growth rate (CAGR) of 4.2%. In 2013, income from smokeable products was $6.4 billion, up from $5.2 billion in 2008.
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."
To End
Governments need tobacco companies, because it provides them with a healthy stream of revenues through excise taxes for example. Furthermore, it is much more popular to tax the evil tobacco conglomerates, rather than increase taxes on middle class voters, or reduce education expenditures for high-schools
The positives behind companies like Altria includes strong brand loyalty, the fact that consumers are addicted to the product, efficiencies of scale and strong pricing power. It would be almost impossible to start a competing tobacco company today, because of the ban on advertising.
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
