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US tobacco giant Altria (MO) reported strong third quarter results Thursday morning. Revenue grew 2.2% year-over-year to $6.2 billion, which was considerably stronger than consensus expectations. When adjusted for one-time items, earnings increased 3.2% to $0.58 per share, roughly in-line with consensus estimates.

The firm took a hefty charge of $874 million to account for early debt extinguishment, and it subsequently took advantage of cheap interest rates, issuing $1.9 billion worth of 2.85% unsecured notes due in 2022 and $900 million in 4.25% unsecured notes due in 2042. We think the new capital can be used to repurchase shares, as the company authorized an additional $500 million in its share repurchase program. Even though we believe shares of Altria are fairly valued, regulations prevent possibly accretive marketing spending, and buybacks and dividends are the best way for the company to create shareholder value, in our view.

Revenue in smokeable products, net of excise taxes, jumped 3.2% year-over-year to $3.8 billion. Adjusted operating company income (OCI) margins increased 40 basis points to 42.4%. The profit performance was encouraging, since we saw other premium cigarette volumes decline 8% year-over-year, replaced by a 14% surge in discount cigarettes. However, strong pricing at Marlboro (volumes up 1%) easily compensated for the other premium declines. Market share gains were similar, up 100 basis points year-over-year to 42.7% for Marlboro, and up 120 basis points overall to 49.9%.

Smokeless tobacco continued its strong performance, as revenues net of excise taxes grew 2.5% year-over-year to $408 million. Copenhagen and Skoal volumes surged 8%, as the combined market share of the two brands increased 160 basis points to 50.9% With smokeless tobacco less targeted by tobacco critics than cigarettes, we expect this segment's volume growth to slightly outpace smokeable tobacco going forward, which is positive for profitability. Segment OCI margins grew to 62.3%, though its $254 million in OCI remains a small contributor to profitability.

Going forward, Altria reiterated its full-year adjusted earnings guidance of $2.19 to $2.23, in line with consensus expectations. We continue to like Altria's pricing power-comparably addictive products are hard to find. Volume declines in the US have mostly been related to increasing taxes and a weak employment. Though shares only score a 4 on the Valuentum Buying Index (our stock-selection methodology), we continue to hold them in our actively-managed portfolios. We still anticipate potential valuation upside and like the company's healthy 5.5% annual dividend yield.

Source: Altria Posts A Strong Third Quarter - We Still Like Its Dividend

Additional disclosure: MO is included in our actively-managed portfolios.