Another Reason to Be Bullish on Altria

Most retailers have been left with little choice other than to cut prices as consumers continue to tighten their belts. One company that is going against the grain, and has the muscle to do so, is Altria (MO).

On Thursday, the company announced that it would be raising prices on several brands of its cigarettes by between $0.71 and $0.81 per pack. The decision was made in response to legislation that will up the federal tax on cigarettes by $0.61 per pack in April. Given the inelastic demand associated with tobacco products, I would expect these price increases to have little to no impact on consumer demand for cigarettes.

Cigarette shipment volume in the U.S. has been declining by a few percent each year in recent years, but companies like Altria, Reynolds American (RAI) and Lorillard (LO) have been able to offset this trend through price increases.

Altria and Reynolds American have also been moving into the smokeless tobacco arena which has become a growth sector in the U.S. In conjunction with the price hikes on its cigarettes, Altria said that it will be cutting the price of its Skoal and Copenhagen smokeless brand by $0.62 per can.

The market appears to have embraced these pricing moves as shares of Altria were up 3.7% in mid-afternoon trading action on Thursday.

I continue to like Altria with its rich dividend yield of 8.3%. In recent months, investors have grown weary of stocks with soaring dividend yields given the prevalence of companies cutting their dividends and the aftershock of such decisions. Make no mistake about it-- Altria will not be cutting its dividend anytime soon. In late August, the tobacco maker actually upped its quarterly dividend by 10.3% to its current level of $0.32 per share.

Altria checked in with relatively sound fourth-quarter results when it reported its earnings in late January. The company announced a 5.7% spike in its adjusted diluted EPS from continuing operations on a 2.8% rise in net revenue on a year-over-year basis. Steady earnings growth has enabled shares of Altria to outperform the market in each of the past 3 years. The stock is well on its way to continuing its streak as shares of Altria are flat in 2009 while the S&P 500 is down 21.0%.

Jim Cramer, my fellow colleague at TheStreet.com, has picked Altria as his Top Stock for 2009. I am also bullish on Altria and think that we will continue to see Altria’s total returns outpace the market over the long term.

Disclosure: no positions

Comments

[Larry House:]

MO would appear to be a safe choice. I have owned it in the past. I do have a personal moral concern with trying to profit off of something that is ruining lives. Also, I think this new administration will be tough on the smoking industry. I am leary of owning something that can face such litigation challenges as well. I will pass on MO. I am not passing judgment on anyone else. To each his own.

Mar 10 04:00 PM

[logicalsinger:]

Tough to argue with an 8% yield for a defensive stock. Looks good to me too. Treasury notes pay you 1 or 2%. I think the extra 6% more than compensates for the extra risk of litigation etc. Good call!

Mar 11 10:56 AM

[oldman:]

I don't like anything to do with litigation. It can hurt any company and MO is unfortuneatly going to have that problem forever. The question is, will it ever be devastating to them. Who knows? If their yield goes much higher, I look at it as a warning sign.

Mar 11 11:33 AM

[EX-AD-MAN:]

Smoking, along with obesity, costs the US and state govts God-Only-Knows how many dollars, annually. If we deed socialist medicine to smokers and the X-large units among us, I say pass me some of that blunt. MO's a buy.

Mar 11 12:28 PM

[socphd71:]

Ex-ad-man wrote:

"If we deed socialist medicine to smokers and the X-large units among us, I say pass me some of that blunt."

Two people gave this a thumbs-up. Maybe they can tell me what it means. Proper American English, please!

Mar 11 07:19 PM

[jljamup:]

:Who,s afraid of the big bad bear.

Mar 12 06:31 PM

[consumerons...:]

Forward earnings less than trailing earnings. Sales growth last 5 years = -25%. ROE last time I looked a couple weeks ago was 29% - still good but not near as good as the last time I looked before that. Debt/equity no longer super-low, now about 2.46. Headlines the other week full of people all saying the same thing: "Hell, if the damned things are gonna cost that much, this time I AM quitting."
You all and all the analysts go ahead and ignore all this. After each of us having smoked for more than thirty years, my girlfriend and I quit not quite 2 months ago now. The money we're saving is much better than the nicotine we're missing. A lot of people who consider themselves long-term dividend investors might consider all this and wonder - how does this look ten years out? I think a lot of people are going to get caught off-guard. Just because something has always been good doesn't mean it always will be.

Mar 13 08:46 PM

[consumerons...:]

It's the next day and still nobody wants to argue with my last posting (above)? C'mon!! I would really like to be talked out of these doubts!! I want that dividend!

Mar 14 08:18 PM

[pontiac35th:]

I think what some people are missing here is that China/India have more smokers than the entire population of the Americas and this is where the futures of Altria/ Philip Morris are. If every person in the US quits smoking, these companies will still make a large profit.

Mar 17 10:44 PM

[User 26337:]

Yeah, but MO spun off its foreign business into PM last year..


On Mar 17 10:44 PM pontiac35th wrote:

> I think what some people are missing here is that China/India have
> more smokers than the entire population of the Americas and this
> is where the futures of Altria/ Philip Morris are. If every person
> in the US quits smoking, these companies will still make a large
> profit.

Mar 27 12:46 PM