Positive Earnings
Altria (MO) one of the world's largest tobacco sellers ended its first quarter of 2012 on a positive note. With earnings near 49 cents per share, surpassing the previous year by 11.4 percent, or 44 cents per share. Overall, revenues for the company totaled $5.65 billion which was ahead of an estimate of $4 billion.
Business segments of the company performed well including smokeable products which saw net revenues up .1 percent to $3.5 billion to the previous year. Smokeless products which include chewing tobacco also saw revenue gains up .3 percent to $380 million.
For cost savings, the company began a billion dollar cost reduction plan for tobacco subsidiaries amid an expected decline in American cigarette volume. The program is expected to save nearly $400 million by the end of the next fiscal year 2013. The company also performed a buyback of 9.9 million shares of common stock worth a total $294 million in the first quarter, and will total $1 billion for the year. The company's stock was down as of this writing .02 points, or .06 percent, finishing at 33.87.
Dividend Benefits & Disadvantages
Altria offers what typically amounts to a 5 percent dividend for stock owners; this has proven beneficial to stock owners. Excluding years in which the company spun off Philip Morris International, and it's stake in Kraft Foods, the company's quarterly dividends grow on average 8.7 percent. Despite growth over the last ten years, the company which holds the majority of it's footing in the US, will have to avoid and holdback regulators from the FDA (US Food & Drug Administration).
Investors Approve
Last Tuesday, the company marked a 52 week high of $33.6 a share. The company has a profit to earnings ratio of 15.85, competitor Lorillard (LO) has a 15.5, Altria has risen 12.45 percent year to date, the S&P maintains a buy rating.
"Depending on the success of Marlboro Eighty-Threes we could image an expansion of the idea and package design into Silver and Gold as well," Jefferies analysts wrote in a report Monday. "Gold is the largest segment for the Marlboro franchise and a modernization of the pack design might further improve the positioning of this sub-brand as well."
Higher Margins
To prepare for a slowdown of US sales after FDA regulations, the company has increased the price of it's cigarettes by six cents a pack, or a 1.5 percent increase on the Marlboro brand, the brand represent 87 percent of the company's volume.
Tobacco companies, as a whole, intend to see a decline in smokers, however, are not subject to negative price elasticity, meaning very few customers stop smoking as a result of price increases.
Volumes for smokeless tobacco are also up at 4-5 percentage annual growth.
Analysis
The company sounds like it could have a few negative contributors in store, but the company has taken a large number of steps to diversify and protect it's core markets.
As an investor being able to receive a 5 percent yield on dividends with 8.5 percent growth is good news. Other positive news is the ability to raise price without fear of backlash from consumers. I agree with other analysts that the company will widen margins as prices for cigarettes increase over time. The company will also do well delivering it's smokeless tobacco brands which as of yet are not subject to similar regulation, but continue to see margins widen. With the targeted cost saving of $400 million by the end of 2013, there should be many benefits to the company's outcome. The S&P estimates the company earnings per share at $2.19 for 2012, up from $2.19 in 2011. The S&P estimates target earnings per share of $2.32 a share, based on a 35 percent tax rate.
The company has positive earnings and has enough cash to repurchase more than a billion dollars in stock from the previous and coming year. Despite government regulations, most litigation has been settled previously and the company looks on track to maintain it's customer base. Additionally, there are further opportunities through it's investment in SABMiller to potentially enter the Beer & Alcohol market, buy.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
