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Altria (NYSE:MO) continues to shine in the tobacco industry. Altria is the highest yielding tobacco stock in the below tobacco peer group. A 5.8% yield is a terrific yield based upon sub 4% 30 year Treasury Bond rates. In this article I focus upon Altria's quarter and the rationale to own this stock in today's economic environment.

Overview:

The Altria Group consists of four companies: 1) PhilipMorrisUSA (major cigarette and cigar brands including Marlboro and Benson & Hedges); 2) US Smokeless Tobacco Company (smokeless tobacco brands including industry-leaders Copenhangen and Skoal); 3) Ste. Michelle Wine Estates (vineyards in Washington, Oregon and California, wine brands such as Chateau Ste. Michelle and Stag's Leap); and 4) Philip Morris Capital Corporation which is a leasing company focused on airplanes, power plants and real estate.

In addition, Altria holds a sizable 27.1% stake in SABMiller, a leading brewer with a major presence in all major continents (Miller, Miller Lite, Coors beer brands in the U.S.).

Business Strategy:

Altria focuses on adult consumers with its portfolio of cigarettes, tobacco, wine and brews. It also has an arm focused on the asset leasing business. Over the past century, Altria has grown through truly synergistic acquisitions that leverage its adult marketing and product distribution expertise. Its corporate mission rest on four key pillars: investing in leadership, aligning with society, satisfying adult consumers and creating substantial value for shareholders.

One major risk that overhangs Altria's earnings is the impact of lawsuits related to its cigarette and tobacco products. As a result, Altria actively promotes the health risks of cigarettes, cigars and tobacco, its primary revenue drivers. That said, Altria contributes significantly to government revenue through excise taxes, which exceeded $7 billion in 2011 alone.

Financials:

For its fiscal year ended December 31, 2011, Altria reported total revenue of $23.8 billion (of which over $7 billion was paid in excise taxes resulting in net revenue of $16.1 billion), operating income of $6 billion, net income of $3.4 billion (a healthy 21% profit margin on net revenue) and earnings per share of $1.64. The bulk of its revenue came from cigarettes, tobacco and cigars. As of December 31, 2011, Altria had cash reserves of $3.27 billion, total assets of $37 billion, $13.6 billion in long-term debt and $3.7 billion in shareholders' equity.

Dividends:

In 2011, Altria paid out a regular quarterly dividend of 4 cents per share for an annual total of $1.64, which is an increase of 7.9% relative to 2010 and its 45th dividend increase over the past 42 years. With shares trading in the $28 range as of early February 2012, Altria's annual dividend yield works out to a healthy 5.8%. In addition to its regular dividend stream, Altria actively increases shareholder value through stock buybacks. In 2011, Altria repurchased $1.3 billion of its shares, making existing shares even more valuable.

Shares:

Altria is a darling with investors. In 2011, Altria shares delivered a 26.9% return, marking the twelfth consecutive year that Altria shares have outperformed the S&P 500 Index (see chart below). Its shares have very high volume and liquidity and trade in a fairly tight range. Altria sports a market capitalization of $58 billion with a P/E of 17.4. Approximately 57.5% of its shares are held by institutional investors.

Peer Group:

Altria's peer group includes similarly diversified consumer products' companies such as Philip Morris International (which was spun off to focus on international, non-US operations), Kraft Foods, General Mills, Reynolds American and Lorillard.

Philip Morris International (NYSE:PM)

Philip Morris is a Virginia holding company. The company is focused upon the manufacture and sale of cigarettes and other tobacco products outside the U.S. Marlboro is the world's leading seller in international sales with 33% of total 2010 shipments.

British American Tobacco (NYSEMKT:BTI)

British American Tobacco is the world's second largest tobacco company by global market shares. The company has products sold in 180 markets with over 200 brands. The stock performance has been an impressive 24.5% return over the past 3 years.

Reynolds American (NYSE:RAI)

Reynolds American is the second largest tobacco company in the U.S. Top brands include Camel, Pall Mall, Doral, Kool, Winston and Salem. The dividend yield is 5.7%, just slightly below the yield to Altria's 5.8% dividend yield.

Lorillard (NYSE:LO)

Lorillard is the third largest manufacturer of cigarettes in the U.S. Founded in 1760, Lorillard is the oldest continuously operating tobacco company in the U.S. The company's to brand is Newport. This product is the company's flagship menthol flavored premium cigarette brand. Newport is the top selling menthol and second largest selling cigarette in the U.S.

Summary:

Altria is a core holding for many investors and share price dips are mostly seen as buying opportunities, both for its out performance of the S&P 500 Index and for its rich and growing dividend stream. The company offers a staple of well known brands, strong revenue, profits and cash flow, management's commitment to steady and sustainably increasing dividends and its industry leading market position.

I recommend investors establish a 3-5% position in Altria due to the low volatility and high income yield of 5.8% based upon February 2nd's closing price of $28.54 per share.

Disclosure: I am long MO, PM, RAI, BTI, LO.

Source: Altria's Double Threat: 5.8% Dividend Yield And Low Beta