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This Tobacco Company May Outperform Its Peers

December 29, 2013 | About:

Altria Group Inc. (NYSE: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.

Recent Performance

2013 has been 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. A 9% boost this year improved on its growth rate from previous years. It has increased its dividend for the last 44 years. The dividend growth rate was about 11.4% for the last decade.

Revenue for the past one year has been at $ 17.72 billion, and 1-year net income growth is of about 32%. Altria's dividend stands above its competitors. Reynolds American (NYSE:RAI) and Lorillard Inc. (LO) provide 5% and 4.3% yields, respectively, which are below Altria's 5.2% yield. Plus, Altria has a dividend track record that places it in rare company. It pledges to return 80% of its yearly adjusted earnings per share to investors via the dividend.

The Future Would Be Like

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'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.

Nevertheless, Altria's dominant market share gives it pricing power and competitive advantages over Lorillard and Reynolds American 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 not only increased its dividend earlier this year, but it also pledged to return even more cash to shareholders in the form of additional share buybacks. Along with its dividend raise, the Altria recently announced a $700 million increase in its share buyback program to its new level of $1 billion.

On a Concluding Note

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’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 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 long about this company.

Rating: 4.9/5 (7 votes)


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