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I am bullish on Altria Group (MO) as it reported strong financial results for 4Q'12 and fiscal year 2012. Analysts are expecting a high growth rate of 7.4% per annum for the next five years. Also, MO has a cheap forward P/E of 14x, high ROE of 94% and a solid dividend yield of 5.2%.

MO is among the leading tobacco companies of the world. It owns a strong brand portfolio, including its flagship brand 'Marlboro'. Also, Marlboro contributes approximately 85% of the company's total cigarette volume. MO has a strong market share in different product categories; it owns 50% market share in the U.S. cigarette category, and holds approximately 55% and 30% market share in smokeless tobacco and cigar categories, respectively.

Recently, MO reported its financial results for 4Q'12 and full fiscal year 2012. Reported revenues (gross of taxes) came out to be $6.2 billion for 4Q'12 and $24.6 billion for the full year 2012, representing an increase of 1.8% and 3.4%, respectively. MO's bottom line also displays a healthy picture if we look at EPS for 4Q'12 and full year 2012. The company was able to expand its adjusted EPS for 4Q'12 and full year 2012 by 10% and 7.8%, respectively, mainly due to an increase in prices.

Moreover, MO was able to deliver healthy results throughout its three major reporting segments; mainly due to higher prices. MO increased its prices by 6 cents a pack on all of its cigarette brands last quarter. MO was able to increase its flagship brand 'Marlboro' market share by 1% to 42.6% in the last quarter as a result of its brand-building efforts. The following table shows last quarter's and 2012's, revenue growth YoY for three separate reporting segments.

Segments

4Q'12 Revenue Growth

Full year 2012 Revenue Growth

SMOKEABLE

2.4%

1.1%

SMOKELESS

7.2%

3.9%

WINE

7.8%

8.7%

Source: Quarterly Report

On concerns of declining cigarette volumes in the tobacco industry, MO has been working on cost saving initiatives. Last year MO completed its cost saving plan of $1.5 billion and is currently working on another cost saving plan that is expected to save $400 million in annualized savings by the end of 2013. The following table shows margins expansion for MO in 4Q'12 as compared to 4Q'11.

4Q'11

4Q'12

Gross Margin

38%

38%

Operating Margin

22%

28%

Net Margin

14%

18%

Source: Quarterly Report

Guidance
MO forecasts adjusted EPS to stay in range of $2.35 - $2.41 for 2013, as compared to $2.21 in 2012, representing an increase of 6% - 9% YoY. Analysts are expecting EPS of $2.38 for 2013 and $2.51 for 2014.

Dividend and Share Buyback
Currently MO offers a high dividend yield of 5.2%, and its past free cash flow and dividend relationship states that dividends offered by the company are sustainable. Also, it has increased quarterly dividends 46 times in the last 43 years.

Other than sharing its successes in the form of dividends, MO is also involved in a share buyback program. In the last fiscal year, 2012, and 4Q'12 the company repurchased shares costing $1.1 billion and $439 million respectively. MO still has almost $57 million worth of share repurchase remaining under its current authorized buyback program of $1.5 billion, which is expected to be completed by 2Q'13.

The following two charts display CFO and dividend relationship and separately show dividend increases over the years.

(click to enlarge)
Source: Annual Reports

(click to enlarge)
Source: Ycharts

Conclusion
MO is a leading tobacco company in the industry and has delivered strong financial results in the past. MO has cheap forward P/E 14x as compared to its peers other than LO, offers a healthy dividend yield of 5.2% and has a high ROE of 94% as shown in the table below. Therefore, I recommend investors to buy the stock.

MO

Reynolds American Inc. (RAI)

British American Tobacco plc (BTI)

Lorillard, Inc. (LO)

Philip Morris International, Inc. (PM)

Forward P/E

14x

14.1x

19x

13x

15.3x

ROE

94%

23%

42%

-

450%

Dividend Yield

5.2%

5.4%

4.1%

5.2%

3.8%

Source: Yahoo Finance

Source: Buy Altria On Earnings: Offers Solid Yield Of 5.2% And Robust Growth