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Altria Group Inc. (NYSE:MO) is one of the leading tobacco companies in the world and owns more than 50% of the market share in the U.S. The company has delivered solid financial performances over the years. MO's cost control program, new product initiatives and an attractive share repurchase program are likely to fuel bottom line growth for the company. The company also offers a safe dividend yield of 4.8% and a potential price appreciation of 8%, based on my price target of $38.80 (calculation shown below). Therefore, I am bullish on the stock.

Financial Performance
MO delivered a healthy financial performance for 2Q 2013. Adjusted EPS for 2Q 2013 was 62 cents, up 5.1% YoY, but missing the consensus estimate of 63 cents. Earnings growth for the quarter was driven by higher operating income in the smokeless and smokeable products segments. Furthermore, lower shares outstanding, as a result of share repurchase program undertaken by the company, also boosted the earnings for the quarter. Net revenues for the company decreased by 2.8% YoY to $6.3 billion in 2Q 2013. The drop in 2Q 2013 revenues was primarily due to lower smokeable segment sales in the quarter. Total shipment volume in 2Q'13 declined by 6.7%.

In the second quarter of 2013, MO total market share increased by 0.3% YoY to 50.7%, while Marlboro's (MO's flagship brand) market share remained flat at 43.7% YoY. The drop in the shipment volume for the quarter was consistent with decreasing volumes for the industry due to rising health concerns and tougher than usual regulations. To counter the impact of lower shipment volume, prices of smokeable products were increased by 5.3% in the quarter.

In 2Q 2013, under its ongoing $300 million share repurchase program, MO repurchased 3.7 million shares for a total cost of $135 million at an average price of 36.27. Another $165 million worth of shares are expected to be repurchased by the end of 2013. As a result of the ongoing share repurchase program, the return on equity for MO will increase.

Other than the aggressive share repurchase program, MO offers a high dividend yield of 4.8%. The current regular quarterly dividend paid by the company is 44 cents per share, leading to an annualized dividend rate of $1.76 per share. MO has consistently increased dividends over the years and has a long term target payout ratio of approximately 80%. A stable relationship between operating cash flows and dividend payments over the years for MO reflects that dividends offered are sustainable. The following table shows the dividend coverage ratio, dividend per share, payout ratio and ROE for MO over the years.

2010

2011

2012

2013*

Dividend Coverage (CFO/Dividend)

0.95x

1.10x

1.15x

-

Dividend Per Share

$1.46

$1.58

$1.70

$1.76*

Dividend Payout

75%

76%

77%

-

ROE

85%

95%

123%

-

Source: Company Reports and calculations

Stock Price Catalysts
I believe MO's new product initiatives remain important catalysts for the stock price. The company's new product initiatives include the launch of its Mark Ten e-cigarette in Indiana, which is expected this month, the introduction of Tju nicotine chewing gum in Denmark, and the expansion of its Verve Discs in Virginia. Other key stock price catalysts include the size of future share repurchase program and the company's cost reduction efforts.

Outlook

The company has revised its 2013 full year adjusted earnings per share guidance to the range of $2.36-$2.41 from the prior guidance range of $2.35-$2.41. MO is expecting a growth rate of 7%-9% from earnings base of $2.21 per share in 2012. Also, MO's cost reduction program is expected to deliver annualized cost savings of $400 million by the end of 2013.

In contrast to the company's earnings projections, analysts are anticipating an EPS figure of $2.39 per share for 2013 and an impressive next five years growth rate of 7.53% per annum.

Risks
An important concern for MO and the tobacco industry is declining volumes. Volumes for the industry are decreasing due to tightening of regulations and also because of a shift towards alternative tobacco products. Moreover, an increase in excise taxes at the state and federal level can adversely impact the financial results of the company.

Conclusion
MO stock is currently trading at $35.50, and based on my price target of $38.80 I believe the stock provides investors with a potential price appreciation of 8%. My price target of $38.80 is calculated using analyst EPS estimate of $2.57 for 2014 and S&P 500's forward P/E of 15.08x.

Furthermore, due to its share repurchase program, cost reduction efforts, and new product initiatives, the company is likely to deliver solid returns in the future. Therefore, I remain bullish on the stock.

Source: Altria Offers An Attractive Investment Opportunity