Is Altria A Good Stock To Buy?

| About: Altria Group, (MO)

By Matt Doiron

Altria Group (NYSE:MO), as with many other cigarette companies, is a popular income stock. Altria has paid a dividend of 44 cents per share in its last two quarters, and has generally been increasing its payments at least once a year for the last few years. The 44 cent per share figure generates a dividend yield of 5.3% at the current price of about $33, which certainly beats many fixed-income opportunities. The stock has risen in line with the market over the last year, though overall Altria is not very dependent on the broader economy: its beta is only 0.4. It is this combination of a low beta and a high yield that makes it attractive to income investors.

Altria Group is focused on sales of Philip Morris products such as Marlboro within the United States (Philip Morris International (NYSE:PM) was spun off several years ago). Net revenue increased 2% in the third quarter of 2012 versus a year earlier, though this was primarily due to changes in the small financial services portion of the company's business; sales of smoking products, which is by far the largest source of Altria's revenue, increased only 1%. However, operating income in smoking products did improve somewhat thanks to higher margins - specifically, segment income was up 4% - and pretax income, after accounting for a one-time event related to the early extinguishment of debt (presumably this move was a smart financial decision) grew 7%. The stock now trades at 17 times trailing earnings; Wall Street analysts apparently expect earnings growth to pick up this year, as the P/E multiple based on their consensus for 2013 is only 14.

Renaissance Technologies, founded by billionaire Jim Simons, increased its stake in Altria by 51% in Q3 2012, to a total of 3.8 million shares (see more of Renaissance's stock picks). Cliff Asness's AQR Capital Management was another large hedge fund with a position in the stock, reporting a position of about half that size (check out more stocks Asness owns). Altria was one of Wintergreen Advisors' largest stock holdings at the end of September; that fund is managed by David Winters and his team, and had two other cigarette stocks among its 10 largest 13F holdings. Find more of Wintergreen's favorite stocks.

We can compare Altria to industry peers such as the previously mentioned Philip Morris International, Lorillard (NYSE:LO), Reynolds American (NYSE:RAI), and British American Tobacco (NYSEMKT:BTI). Lorillard and Reynolds American have the higher dividend yields of this peer group, both above 5%, and are comparable to Altria in that regard. Earnings growth at each of these companies was in the 6%-7% range, even though sales were actually down at Reynolds American. These two stocks also have beta of 0.4, lower than Philip Morris International or British American. As a result they are good income stocks, and Lorillard stands out as having a trailing P/E of only 14. Unless there is some reason why the stock has a discount to its peers, it might be a candidate for value investors as well.

Bottom-line growth was more modest at British American, and Philip Morris International actually reported lower revenue and earnings in its most recent quarter compared with the same period in the previous year. Earnings multiples are actually higher than at Altria, with trailing P/Es of 18 and 19 respectively. So we have companies with somewhat lower yields, poorer performance in recent quarters, and higher valuations in terms of historical earnings. As a result we think we would avoid both stocks for now.

We aren't sure that Altria makes much sense as a value investment - if any cigarette stock does it would probably be Lorillard and we would have to take a closer look at that company to evaluate the claim. From an income perspective, Altria, Lorillard and Reynolds all look competitive in the sense that they have little market exposure and pay yields of more than 5% at current prices and dividend payments.

Disclosure: I am long PM.

Business relationship disclosure: This article is written by Insider Monkey's writer, Matt Doiron, and edited by Meena Krishnamsetty. They don't have any business relationships with any of the companies mentioned in this article and they didn't receive compensation (other than from Insider Monkey and Seeking Alpha) to write this article.