Altria (MO) released its third quarterly results last week. It posted a 44% decline due to a debt-repurchase charge. Although cigarettes sales were up 1.3%, revenue remained at 2.2%, which was $6.24 billion dollars, versus the $4.5 billion dollars estimated. EPS was only 43.9 cents, instead of the 58 cents estimated.
Around 73% of Altria's sales come from cigarettes, but strong sales of smokeless tobacco were impressive. Smokeless tobacco accounted for around 10% of sales and has been growing 3.5 to 4% yearly. Copenhagen and Skoal are now 15% of sales. Cigarette use has declined 1.2% to 2.4% since 2009, but Altria's other brands are making up for this loss. EPS this year is earmarked for $2.21, versus the projected $1.64.
Altria's gross margin is 55%, with net margin of 14.7%. Altria's total debt is 19.65% of its assets and debt related to equity is 47.37%.
One advantage of owning Altria stock is its high paying and consistent dividend. Altria has raised its dividend 46 times in 44 years at a rate of around 8.7% this year. In August, the dividend went up to 44 cents quarterly. A high dividend rate is typical with tobacco stocks.
As of now, Altria has the market on smokeless tobacco. The sales of this product are projected at 4 to 10% annually. Its competitors are Reynolds American (RAI), whose sales were diminished by 30% in 2011. Lorillard (LO) did see a rise of 10% in sales in 2011 due to its Newport brand. British American Tobacco (BTI) sales were down 0.6% due to weakness in Russia, Italy, Turkey, and Egypt. Of the other tobacco companies, none have the diversity of Altria.
More and more countries are participating in litigation and excise taxes. U.S. companies won in Federal Appeals Court when judges ruled not to force tobacco manufacturers to locate graphic pictures of diseases on cigarette packs. The judges held it violated the tobacco company's First Amendment rights. However, the FDA is trying to appeal the case by altering the size of the graphic. No court has granted a hearing.
In Russia, as of yesterday, Putkin passed an ordinance starting January 1st, 2013, no smoking is to be allowed in public places, no commercial ads or promotion are to be permitted by tobacco companies, and no tobacco sales are to be made at kiosks. Russia is the second highest consumer of cigarettes behind China. Altria sells 20% to 30% of cigarettes in that country.
In Australia, there is a ban on advertising. Cigarettes have to be packaged in plain brown wrappers with small lettering on the packs to distinguish the brands. Europe, particularly England, is considering such a ban.
Many countries are contemplating or litigating a substantial excise tax on cigarettes. As it stands currently, the taxes on smokeless tobacco products are not as high. This will most likely change as these products become more popular and sales climb.
Plain wrappers and limited distribution outlets will probably have little effect on sales; however, heavy excise taxes may reduce sales largely on cigarettes and smokeless tobacco.
Another prosecution item is Pfizer (PFE), the manufacturer of Chantix, the anti smoking medication, which is going to court this week. There are 2,600 suits against the drug. The judge has not allowed additional marketing until trials are conducted. Pfizer's $1 billion dollar drug lost 10% this year. Total sales reached $300 million.
Cost of Capital
A problem Altria possesses is the value of its debt. Although cigarette consumption has steadily decreased by 2% to 4% annually, Altria seems to have shown steady increases per share by 8% or so. It has managed to do this by increasing prices and cutting costs and entering into the cheaper cigarette market. It also has announced a $1 billion dollar buyback. Altria has about 14 billion dollars in debt. The company bought back 2 billion in bonds. This resulted in a lower economic guidance number last quarter. Altria's debt is at 6%, or 2% over 30 year prime due to the acquisition of U.S. Tobacco. If interest rates go up, Altria will have to buy back debt to pay financial dividends. If the rates go up 2% or more then Altria will not be able to borrow to pay dividends
Altria will probably use higher prices and lower costs to maintain earnings, but if the market share falls 3% to 5% or more, Altria will have to cut dividends significantly.
Of the tobacco stocks, Altria is in the leading diversified position. It will virtually dominate the market for a while with the profitable smokeless tobacco sales. It has delivered faithfully rich dividends and seems to be on track for sales other than cigarettes. This is a wise plan. I believe Altria's revenue will be around $23 or $24 billion in 2013 and 2014, barring interests rates rising much. Most analysts rate Altria as a buy or hold. For the active trader, I recommend buying at current prices.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.