Why own any stock if it doesn't pay a dividend. While the S&P 500 and its tracking exchange traded fund, SPY (SPY), has rallied over 20% from the summer lows of last year, and stocks such as Apple (AAPL) are up over 30% this year, few sectors of stocks have performed better than dividend stocks over the last year.
Over the last several year Tobacco stocks have consistently been some of the best performing and most popular dividend stocks in the market. The largest and most popular tobacco stock is Altria (MO).
Altria is up nearly 50% in the last year, and this company has consistently been one of the best performing stocks in the overall market the last couple years.
This is why I thought the company's recent earnings report was so interesting. I've recommended tobacco stocks repeatedly over the last year, including recommending investing in Lorillard (LO) in the seventies in my first article on Seeking Alpha over a year ago.
Altria trades today at 21x trailing earnings and nearly 15x average estimates for this years earnings. Still, while Altria's cash flow remains strong, this company has had little to no growth over the last year, and the company's using over 80% of its net income for dividends and buybacks.
This is why I question the company's recent earnings report. Altria recently reported a 1.5% drop in year-over-year volume shipments adjusted for trade inventory effects, and the company reported earnings per share growth of around 7-8%. Management guided to likely earnings per share of $2.19-$2.23 for 2012, which is what analysts previously expected. The company also announced a new $400 million a year cost savings program and disclosed that management had bought back nearly $66 million in shares at around $32.40 a share in the first quarter.
While Altria's top and bottom line numbers were fairly solid, I think a deeper analysis of some recent volume and pricing trends are troubling for this industry leader. Altria's minimal annual drop in overall cigarette shipments was certainly solid, still performance of the company's premium brands such as Marlboro were poor. Even though the Marlboro brand gained market share of .2%, Marlboro shipments were down nearly 1%, net income from Marlboro shipments dropped, and the companies premium cigarette brands saw a nearly 9% decrease in volumes.
Altria's stabilizing shipment numbers were largely achieved with the company offering significant discounting, and management increasing the companies discount brands market share. Altria reported that the companies main discount brand, L&M, saw a 24% rise in volumes this past quarter.
To conclude, while Altria's acquisition of UST and position in SAB Miller, as well as the companies St. Michelle wine franchise and John Middleton tobacco brand, give this company some substantive revenue outs of the companies cigarette divisions. Still, Altria gets over 80% of its overall revenues from cigarettes, and the company is being increasingly forced to use cheaper cigarette brands to offset market share losses from competing discount cigarettes offered by competitors Lorillard (LO) and Reynolds (RAI). Altria's operating margin of nearly 42% was very strong this past quarter.
Still, the company debt to equity ratio is over 350%, and management is leveraging the balance sheet to inflate the companies likely long-term return on equity. Altria only has around 6x coverage of interest rate payments, and the companies debt is trading at 5-7%. If interest rates increase modestly and company is continued to force to increasingly market discount brands, this industry leaders growth and margins are likely to face significant pressure.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.