It appears that the investing atmosphere gravitating toward different dividend companies is going to be with us for quite some time because it doesn't look like the market atmosphere is going to change soon. Over the last few years companies like Altria Group (MO) have become a popular place for income investors because of the high dividends. The concern that tobacco sales is, (or would be) dropping significantly appears to be of little concern. Let's take a look at what has happened to tobacco over the years and I will give you my opinion on how this particular company will do in the near future.
Growing Profit Pool
It's interesting how tobacco manufacturers' "profit pool" has increased despite the pressing discouragement to smoke. In 2007 profits totaled $11.1 billion and in 2012 it had risen to $13.8 billion with a CAGR of 4.5%. This in itself is good for the tobacco companies but it's even better for Altria because it has gained a larger share of the profit pool. During the same period, its share rose from 44% to 52%, an increase of eight percentage points. This is encouraging for the investors.
And despite the discouragement of its usage, tobacco has stayed fairly consistent for the last six years if you look at the graphs below from the National Health Interview Survey. It has been fairly steady not having any significant drop. The "National Health Interview Survey" for the United States from 2005 through 2010 saw barely a drop in the number of adults between the ages of (45 - 64). In 2005 between men and women the average usage of tobacco was 21.9% of the population and in 2010 it had barely dropped 21.1%. It is true that the younger population appears to have been less influenced over time because they are using it much less. The age bracket of (25 - 44) went from 24.1% to 22% respectively, a 10% drop.
For all the energy put into the discouragement of the use of tobacco there hasn't been a significant turn down and the manufacturing and use of tobacco continues to be strong in my opinion. In 2010, 19.3% of the entire adult population was smokers compared to 20.9% in 2005. Even that represents a large number of people who quit smoking, and this is still a very slow rate of decline and has been estimated that by 2020 the percentage of smokers in the United States as adults would be 17%. This is far higher than the target set at 12% by "Healthy People 2020." So from 2005 through 2010 it appears we had an average drop of 7% but the population also grew by 1% on average
Tobacco Alternatives Growing in Popularity
Even though cigarettes are down by 3%, smokeless products have grown more and more popular increasing by 5%. Tobacco companies are very much aware of the decreasing cigarette market because of excess regulation and social stigma. For this reason they have been heavily investing in what I would call the next generation smoke-free tobacco products as an alternative to cigarette smoking. There are alternatives being developed like: noncombustible alternatives to cigarettes, nicotine inhalers, vaporizers, and electronic cigarettes.
Even though this is a growing market it still dwarfs in comparison to smoke tobacco. Out of a $664 billion tobacco global industry, this accounts for barely $14 billion. 90% of the revenue is still from the old-fashion sources and this is important to understand. Even though tobacco alternatives are growing in popularity they still are but a speck in the market as a whole and they're not going to grow by leaps and bounds in the near future as investors our dividends are still coming from smoke tobacco products and will continue for quite a while.
Cost Management Strategy
Cost management is always a priority with companies that are looking to make sure that they're sharing enough of the profit with shareholders. Altria launched an initiative almost a year and a half ago now with the intent of saving $400 million a year by the end of 2013. The company is focusing on reducing cigarette related infrastructure.
So even though there are huge obstacles to the tobacco smoking industry, it's not going away soon. MO's attractive dividend structure will continue to invite income investors to the company as long as this dividend friendly climate exists. The company has paid good dividends and will continue to pay good dividends. It has increased dividends 46 times the last 44 years. Just from 2008 - 2012, after the PMI spinoff, the company has a CAGR of 8.7% annually for its dividend growth rate. In that period it has grown from $1.16 to $1.76.
With the dividend rate of around 5%, this stock will be around a long time. With all the pressure that the government puts on tobacco companies, discouraging the public from smoking, tobacco usage is not dropping at such alarming rates that the companies are going to struggle. Companies that sell tobacco are here to stay for now and they have good dividends and income investors are going to continue to put their money there because the market is inviting dividend investment and is not going to change in the near future.