Tobacco Options For A Weakening Economy

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 |  About: Altria Group, Inc. (MO)
by: Bear Fight

Investors concerned about market volatility due to global uncertainties should pursue businesses with stable, non-discretionary and recession proof business models. Investors can find securities overlooked by Mr. Market in a highly correlated "risk on" and "risk off" world. One of my favorite picks is cash cow Altria Group (NYSE:MO).

Business Overview: Altria Group engages in the manufacture and sale of cigarettes, smokeless products, and wine. The Company markets cigarettes under the iconic Marlboro brand as well as Virginia Slims, Parliament, Benson & Hedges, Basic, and L&M brands.

Key Stats

  • Price to Earnings: 17.3x
  • Beta: 0.39 (indicates less volatility than the S&P500)
  • Debt to EBITDA: 2.0x
  • EV/ EBITDA: 9.5x
  • Dividend Yield: 5.7%
  • EBITDA Margins: 40%

Cash Cow

Investors are attracted to Altria due to its robust dividend yield of 5.7% and its strong free cash flow generation. Altria remains modestly levered at 2.0x debt to EBITDA. The Company's free cash flow can be used to boast dividends or buyback stock. Retiring shares will further boast the Company's EPS.

EBITDA less capital expenditures equated to $6.6 billion in the latest 12 months or $3.17 per share. The Company is generating approximately 11% of its current share price in free cash flow per annum.

While smoking is not a growth business in the developed world, the Company's brand and durability of cash flow provide for a stable business model. Healthy EBITDA margins of approximately 40% indicate a strong value proposition and strong barriers to entry. Altria should hold up despite a slowdown next year. Smoking is non cyclical and most smokers view it as a non discretionary expense. This is borne out by the stable cash flow and dividends.

While the Company has a very high payout ratio of 84% in the LTM period, the Company operates an exceptionally stable and resilient business model.

2008

2009

2010

LTM Period

Diluted EPS

$1.65

$1.75

$1.84

$1.84

Dividend / Share

$1.68

$1.32

$1.46

$1.55

Click to enlarge

Covered Call Strategy

While I am a long-term holder of Altria I utilize a covered call strategy to bolster income. I typically sell 3 - 6 month duration calls against my existing position. The June 15, 2012 $30 calls trade at a premium of $0.64 or a 4.2% annualized premium to today's price.

Disclosure: I am long MO.