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There are only three major players in the U.S. cigarettes and smokeless tobacco market due to regulatory barriers to entry and high legal costs related to this business. Altria Group (MO) controls about 50% of the market with the rest split between Reynolds American (RAI), Lorillard (LO), and a few minor cigarette manufacturers.

I like Altria's dividend king status. It pays a $0.41 quarterly dividend for an yield of 5.3% which I think the company's cash flow and earnings can support and it is able to grow earnings despite declining cigarette sales. Altria, in addition to owning the best selling brand (Marlboro), is the leader in smokeless tobacco sales in the U.S. which has become more popular in recent years.

Also, the company is the most diversified of the domestic cigarette makers providing exposure to growth markets with its 27% stake in the global beer company SABMiller (SAB.L) and with its domestic smokeless tobacco, cigar and wine businesses. All this, in my opinion, outweighs the legal risks associated with tobacco companies and unless tobacco is outlawed completely I believe Altria will continue to reward its shareholders.

In 2011 Altria reported $2.05 adjusted (excluding litigation settlements) earnings per share with an estimate of $2.20 of adjusted earnings per share in 2012, a growth of over 7% despite an expected increase in revenue of 1.3% due to positive revenue expectations from its small financial services business and with the help of share repurchases amounting to 1.5% of its shares outstanding.

Reynolds American is expected to have flat revenues in 2012 compared to 2011 and grow its earnings per share at 6% while repurchasing 2% of its shares. Lorilard, another major competitor to Altria, should grow its earnings per share at about 12% but this is after the company repurchases an expected 8% of its shares outstanding in 2012. Also, I see more risk in Lorilard with the company's focus almost entirely on menthol cigarettes, which are considered more dangerous to your health, and the Newport brand.

In terms of valuation, Altria trades at a discount to the group of three, and I think this makes its stock even a worthier investment. The company's 2012 price to earnings (adjusted) is about 12.8 compared to 13.5 for Reynolds American and 13 for Lorillard. Its annual dividend yield of 5.3% is also better than that of Lorillard (4.5%) and comparable to that of Reynolds American (5.3%).

Altria has about 90% of its revenue coming from its cigarettes division which includes the premium brands Marlboro and Parliament, and the value brand Basic and sales are expected to decline by about 2% in 2012. The rest of its revenue is from smokeless (7%), expected to grow 10% in 2012, cigars (2.5%) expected to increase 8% this year, and wine of about 2% rising 7% in 2012.

The financial services recorded negative revenue in 2011 due to write-offs. The decline in cigarettes sales is offset nicely by a rise in the other three categories. In addition, Altria's 27% investment in SABMiller is valued at approximately $11 billion or over 15% of Altria's own market value and potentially worth more due to SABMiller exposure to growing emerging markets.

Altria, similar to Lorillard and Reynolds American, is subject to a number of lawsuits. In my opinion the lawsuits will be resolved in the near future and Altria will be free of risks associated with unresolved legal matters. The company has won a number of suits in and had major favorable rulings in 2011 and I believe that the public anger at cigarette makers is decreasing. Settlements with the states in which the tobaccos companies paid billions to the states were used to cover holes in the states budgets and to issue more debt backed by those settlements and only a small part of the money went to healthcare.

It seems like while the cigarettes companies were clearly villains in their advertising, the state governments are not necessarily the good guys in this story. While there are pressures on states and cities of stricter smoking laws and higher cigarette taxes, Altria should be able to withstand this with its proven ability to raise prices and improve its operating margins. Even at a price of $10 a pack, the Marlboro brand image is as strong as ever and the cowboy we all know is not about to die.

Recent legislation has given more power to the Food & Drug Administration to regulate tobacco products. While this may be viewed as a negative by some investors in my opinion it is beneficial for the tobacco companies as it shields them of future lawsuits, provides barriers to entry and solidifies the position of the current big three tobacco makers. In addition, state and local governments are increasingly relying on taxes from tobacco sales and I believe there are minimal risk of major impact on the tobacco companies arising from legislation.

In conclusion, I believe that Altria is positioned to reward shareholders with its healthy dividend yield of 5.3% and prospects for growth. In addition, the company is a leader with its Marlboro and Parliament brands in cigarettes, Stockholm and Skoal in smokeless tobacco, and in cigars with its 2007 acquisition of John Middleton.

Its 27% ownership in SABMiller provides additional diversification and with a price to earnings ratio of 13.5 for 2012 it appears there is still value to be realized in the company's stock. I recommend Altria for investors whose consciousness are not bothered by the fact that tobacco products are dangerous to your health.

Source: Altria: This 5.3% Dividend King Can't Lose