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If an investor had made a $100 investment in Altria (NYSE:MO) on the first day of the trading year back in 1970 (01/02/1970), they would have purchased just under three shares, at $36 a share.

Today, after 43 years of compounded gains, the investor would hold 267 shares and the investment would be worth $9,619 - a return of 41,456%, making Altria one of the best performing stocks of all time, outperforming the S&P 500 over the same period by a whacking 40,081% (Apple returned 11,509% over the same period).

Of course, Altria has changed significantly since then - the company has spun-off its international tobacco operations into Philip Morris International (NYSE:PM) and sold its majority stake in Kraft Foods (NYSE:KRFT). Furthermore, tobacco opinions and habits have changed significantly since the 70s and Altria is having to grapple with falling sales volumes.

That said, Altria still holds about 50.5% of the US cigarette market and the company's premium Marlboro brand accounts for 43.6% of all cigarette sales in the US, providing a constant revenue stream for the company. Additionally, Altria has some interests in the alcohol market, with its own wine estates and 30% share of SABMiller.

So, what's the financial situation of Altria and does the company look like it can continue to provide returns that far outstrip the market?

Revenue

$US Billions

2009

2010

2011

2012

4-Yr Compounded growth rate

Revenue

$16.8

$16.9

$16.6

$17.5

YoY Growth

5%

1%

-2%

5%

4%

Altira's revenue growth over the past four years has been disappointing. The company has only achieved a CAGR of 1.4% - less than the rate of inflation, indicating that the company's revenue, in real terms, has actually fallen.

Having said that, after considering the falling volume of tobacco sold throughout the US and the winding down of the company's finance division, Altria's almost glacial revenue growth does not look as bad.

Moreover, as I explain below, while the company's revenue has remained stagnant, net income has actually increased, a good result for shareholders.

The Gross Line

Cigarettes do not cost much to manufacture so Altria benefits from a solid gross margin, averaging 53.5% over the past four years. The company's gross margin gained 4% from 2008-2009 and since then has remained constant as Altria raises the prices of its tobacco products in-line with declining sales, resulting in a constant gross margin and income for the company.

While Altria has diversified into other industries besides tobacco, tobacco sales account for more than 90% of the company's revenues, so the company still benefits from the profit margins and cash flows that tobacco companies are well known for.

$US Billions

2009

2010

2011

2012

4-Yr Average

Gross Income

$8.8

$9.2

$8.9

$9.5

Gross Margin

52%

54%

54%

54%

53.5%

Expansion/Contraction

4%

2%

0%

0%

%

Little Surprises

One of the biggest surprises that lurk in income statements are unusual items and debt interest. Both can be highly indicative of a company's financial situation. For example, a company that has high, recurring unusual expenses could be trying to hide poor results, or attempting to camouflage losses as one-offs, without revealing to investors the true extent of its failings.

In addition, interest expenses and interest cover ratios can influence the company's future performance. In particular, rising interest expenses can constrict net income and a falling interest cover can signify rising debt and falling income - both of which could indicate that the company is heading for trouble in the future.

$US Billions

2009

2010

2011

2012

4-Yr Average

Unusual Expenses

$0.6

$0.3

$0.5

$1.2

Interest Expense

$1.2

$1

$1.2

$1.3

Pre-tax Income Interest Cover (Times)

4.1

5.2

4.7

5.9

Unusual expenses have been rising at Altria, although on closer inspection these are all related to three things: Altria's own restructuring, SABMiller's business "capability program" (restructuring and cost reduction program) and SABMiller's acquisition of Australian brewer Fosters.

These one-off should be earnings enhancing in the future but during the past few years they have been sapping Altria's earnings - I would be suspicious if these "one-offs" continued into 2013 and 2014.

On the interest front, interest expenses have remained relatively static, declining slightly during 2010 but then gaining into 2011-2012. However, the company's interest costs were covered by pre-tax income just under 6x during 2012 - giving the company plenty of room to maneuver financially.

With interest coverage figure rising, it would appear that the company's net income is rising faster than debt.

The Bottom Line

$US Billions

2009

2010

2011

2012

4-Yr Average

Net Income

$3.2

$3.9

$3.4

$4.2

Net Margin

19%

23%

20%

24%

22%

Net Income Growth

3%

22%

-13%

24%

31%

Altria's net income has grown at a CAGR of 9.5%, far outpacing the firm's revenue, which only grew 1.4% over the same period. Altria's rising net income can be attributed to the company's improving efficiencies as lower costs have enabled the company to expand its net margin by 5% over the four-year period.

2011's net income was hit by a slight fall in revenue but this decline was soon recovered.

Cash Flows And Balance Sheets

$US Billions

2009

2010

2011

2012

4-Yr Average

Operating Cash Flow

$3.4

$2.8

$3.6

$3.9

Investing Cash Flow

-$9.8

$0.26

$0.4

$0.9

%

Financing Cash Flow

$0.28

-$2.6

-$3

-$5.2

Free Cash Flow

$0.5

-$0.4

$0.3

$0.4

%

Free Cash Flow as a % of Revenue

3%

-2%

2%

2%

Like most tobacco companies, Altria has a high operating cash flow but low investing cash flow outflows as there is almost no need for the company to spend money on CAPEX and other investing activities.

The company returns most of its operating cash flow to shareholders, as is further highlighted below.

$US Billions

2009

2010

2011

2012

4-Yr Average

Current Ratio

0.7

0.9

0.9

0.8

Quick Ratio

0.5

0.6

0.7

0.5

Short-Term Debt

$0.8

$0

$0.6

$1.5

Long-Term Debt

$11.2

$12.2

$13.1

$12.4

11%

Cash

$1.9

$2.3

$3.3

$2.9

$2.6

Net Debt (Cash)

$10.1

$9.9

$10.4

$11

The most worrying part about Altria's financial situation is its current liquidity. The company has neither a current ratio or quick ratio greater than 1, signifying that the company is not able to cover all of its current liabilities with current assets. Furthermore, the company's quick ratio has never been greater than 0.7 over the past four years - even with an average of $2.6 billion of cash on its balance sheet.

The company's net debt position has been steady over the past four years and, as I have written above, interest costs have remained manageable - indicating that even though the company's short-term liquidity is poor, the company could issue more long-term debt to cover current liabilities without any trouble.

Shareholder Returns

$US Billions

2009

2010

2011

2012

4-Yr Average

Buybacks

$0

$0.1

$1.3

$1.1

Dividends

$2.7

$3

$3.2

$3.4

As a % of Net Income

84%

79%

132%

107%

101%

On average over the past four years Altria has returned 101% of its net income to shareholders. Indeed, the company has only started buying back shares during the last two years and it would appear that the company has been making use of low interest rates to borrow cash to buy back stock, in particular, during 2011 when the company returned 132% of net income to shareholders and the company's net debt position deteriorated by $500 million. As the company is paying minimal interest rates to improve shareholder returns this could offer a very good return for shareholders.

Overall

So overall, Altria continues to provide decent returns for shareholders. However, with revenue stagnating I believe that the company will no longer be able to achieve the record returns for investors that it has done in the past.

Having said that Altria offers investors some decent returns with a solid share buyback plan and yield of 5%, which is well funded. Furthermore, the company has been expanding its net income margin while revenue stagnates so it's not all bad news.

Altria may no longer offer the potential for capital gains like it has done in the past but for income the company offers a decent strong dividend.

Source: A Quick Look At The Financial Situation Of Altria