Altria (NYSE:MO) is the largest of the cigarette manufacturers. While Altria has a division that produces and sells blended table wines under the Chateau Ste. Michelle and Columbia Crest names, and has around a 27% economic interest in brewer SAB Miller (OTCPK:SBMRY), the vast majority of its business comes from the sales of cigarettes and tobacco products. The tobacco industry is a slow growth industry and no experienced investor would expect to see rapid earnings growth from any of the companies in the industry.
Altria's recent earnings statements reflect the fact that it is a mature company with slow earnings growth. In 2011, Altria had revenues of $16.6 billion which was a 1.2% decrease from revenues of $16.8 billion in 2009. Year 2011 net income was $3.4 billion which was a 6% increase from net income of $3.2 billion in 2009. Over the last couple of years, Altria along with its tobacco industry competitors have had relatively small revenue increases, but have still been able to give their investors above average returns.
Despite the slow earnings growth, Altria's stock price has increased by 128% over the last three years, while Reynolds American (NYSE:RAI) stock price has increased by 148%, Lorillard (NYSE:LO) stock price has increased by 117% and British American Tobacco (NYSEMKT:BTI) stock price has increased by112%. Since it is obvious that investors are willing to sink money into tobacco stocks, they must be considering factors other than earnings growth. The clear reason that investors flock to tobacco stocks is because they are seeking to benefit from the industries stable earnings and high yields dividend payments.
Altria gives long term income investors exactly what they are seeking. For one Altria's stock offers investors capital appreciation, and even though the stock price has soared over the last three years, it still continues to move higher and is up by 20% over the last 52 weeks. The company's dividend is a whopping $1.64 with a dividend yield of 5.1%. In addition the dividend continues to increase, and if you trace the company's dividend history back to the old Phillip Morris Company it has increased its dividend for 49 straight years. Since the company's spin off from Phillip Morris in 2008, it has increased the dividend five times by 41.3%.
First Quarter Earnings
Altria reported first quarter earnings on April 26th. In the firsts quarter announcement we learned that the company had first quarter earnings per share of $0.48, which was a 6% increase from earnings per share of $0.45, in the first quarter of 2011. First quarter revenues were $3.99 billion compared to revenues of $3.94 billion in the first quarter of 2011. First quarter net income was $973 million compared to net income of $937 million in the first quarter of 2011. Altria also reaffirmed its full year 2012 earnings guidance of $2.17 to $2.23 per share which indicated earnings per share growth rate of 6% to 9%. Altria's Chairman and CEO Michael Symanczyk said "The performance of our tobacco companies' premium brands and effective cost management drove increases in adjusted operating companies income and margins in the smokeable and smokeless products segments." Once again Altria's operational earnings were relatively stable.
Positives for Altria moving forward
- Altria's stock is trending upward. The stock is up by 20% over the last 52 weeks and up by 12% since the beginning of the year. The stock benefits because it is a low risk high yield stock in a low interest environment.
- Altria has increased its dividend for 49 straight years and will almost certainly increase it dividend again before the third quarter of 2012.
- Altria has several well established brands such as Marlboro, Benson & Hedges, Copenhagen and Skoal. These brands have a loyal, and some might say an addicted customer base, which will serve to stabilize revenues.
- "Altria repurchased 9.9 million shares of its common stock at an average price of $29.71 for a total cost of approximately $294 million during the first quarter of 2012."
- In October of 2011 Altria announced a cost reduction program, which is expected to reduce cost by $400 million by the end of 2013.
- On May 16th Altria increased its full year earnings estimate by $0.11 to $2.25 to $2.31 per share. The increased earnings estimate was made because of higher earnings from brewer SAB Miller in which Altria has a 27% ownership share.
Negatives for Altria moving forward
- Altria has had relatively flat revenues for the last four years and has no prospects which could help to increase revenues in the foreseeable future.
- Altria has over $13 billion in long-term debt on which it is paying interest of 7% to 9%.
- Altria's overseas cigarette shipments slipped by 4% in 2011.
- Altria board of directors may be concerned about Altria's dividend payout, which explains the $1 billion share repurchase plan, that some think is an effort to reduce the dividend payout by reducing the amount of outstanding shares.
Each of the stocks in the tobacco sector have performed well. In addition, each of the stocks in the sector pay a strong dividend. I think that these stocks still have room to move higher, but in terms of which tobacco stock offers the best investment opportunity, I would have to say Reynolds American. I think that Altria and Reynolds American are the top two prospects, but Reynolds American has a higher dividend yield than Altria at 5.8% versus 5.1%. I also like the fact that Reynolds American is cheaper than Altria, with a price to book value of 3.86, versus Altria's price to book value of 13.7. Finally, I prefer Reynolds American's balance sheet, which shows a total debt to equity ratio of 60.6, versus Altria's total debt to equity ratio of 366.4. I believe that Reynolds American's strong financial position and cheaper valuation make it the most attractive investment in the tobacco sector.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.