Stock of the Day - March 9, 2009 - MO

Altria Group, Inc. (MO)

Altria Group (MO) manufactures and sells cigarettes and other tobacco products in the United States through its subsidiaries.  Through Phillip Morris USA, Altria sells cigarette brands such as Marlboro, Virginia Slims, and Parliament.  Through John Middleton, Altria sells Black & Mild cigars.  And, through its recent acquisition of UST, Altria sells smokeless tobacco brands such as Skoal and Copenhagen.  The company’s stock price is currently trading at $15.86, and while it is off from its 52-week high of around $22 per share, it has held up relatively well throughout the economic downturn.  Altria is actually only one of nine stocks in the S&P 100 that is up so far in 2009. 

Altria is easily one of my favorite stocks for 2009 and for the long-term! There are many factors that go into my adoration for this company, so hear me out while I take you through the many positives.

Altria’s first advantage is its dominance in the U.S. tobacco industry.  In 2008, Altria had a commanding 50.7% share of the domestic cigarette market, with Marlboro (its most popular brand) gobbling up 41.6% of the cigarette market.  With Altria’s recent acquisition of UST, the company also has a 57.4% market share of domestic smokeless tobacco.  Second place in the industry is nowhere even close, and with tobacco advertising illegal in the U.S., I don’t see how any company could ever take a big chunk of market share from Altria’s dominant brands. 

Let me talk more about Altria’s recent acquisition, as the addition of UST is the biggest growth prospect for the tobacco giant.  Altria’s subsidiary, Phillip Morris USA, bought UST for $10.3 billion in January.  UST is the nation’s biggest smokeless tobacco maker, with famous brands such as Skoal and Copenhagen.  This acquisition was huge for Altria, because while cigarette consumption has been dropping about 3% a year, smokeless tobacco sales have been increasing by about 5% or more a year.  In 2007, U.S. consumers spent $78 billion on cigarettes, and only spent $4.77 billion on smokeless tobacco. So, from the numbers, it is clear that the smokeless tobacco industry could be the next big thing for tobacco companies such as Altria.  And, with its recent acquisition of UST, Altria has set itself up well to take advantage of the growth of smokeless tobacco consumption. 

You might be wondering how I could love a tobacco company when cigarette sales are falling 3% per year.  The answer is that, because tobacco is addictive, tobacco companies like Altria can make up for the drop in consumption by increasing the price of cigarettes without worrying too much about their customers quitting smoking.  For example, the federal government just announced a federal excise tax on cigarettes effective starting March 9 that will increase the tax on cigarettes from 39 cents to $1 per pack (61 cent increase).  Instead of worrying about the increase in taxes, Altria simply transferred the tax to its customers.  The company has raised the prices of its famous Marlboro cigarettes by 71 cents a pack.  So, not only did the company make up for the tax, but with an increase in selling price of 71 cents per pack compared to a tax increase of 61 cents per pack, Altria will actually make 10 cents more per pack than it used to.  This extra 10 cents per pack will greatly help the cigarette maker’s profits, and it should send the stock price higher and higher in the future.

For the same reason that Altria can raise cigarette prices without worrying too much about a drop in cigarette consumption, investors can be confident that Altria’s sales will remain generally immune from the economic downturn, as smoking is addictive and hard to stop.  I have even read some studies that show during recessions like the one we are currently experiencing, more people start smoking and less people feel the need to quit.  So, unlike construction companies like Caterpillar (CAT) that are very cyclical and have their profits tied to the state of the economy, Altria’s profits are very stable, and that stability is very attractive in this environment.

The final, and possibly the most attractive, positive aspect of Altria’s stock is the dividend (past Trillionaire Term of the Day).  With a current dividend payout of $1.28 and a dividend yield of 8.30%, the stock could remain at its current price and you would still make a very solid and enviable return of 8.30% on your money.  In a market that has fallen around 50% in only one year, a high dividend yield like that is precious. In today’s economic environment, where companies are constantly slashing dividends to conserve cash, Altria’s dividend is also one of the safest in the stock market.  I can say this with confidence because the company has a lot of extra cash, and it has increased its dividend payout for 42 consecutive years!

The biggest knock against Altria is always litigation concerns, and worries that the government will do something ridiculous like impose a complete ban on cigarettes.  My argument against legal concerns from people suing Altria is that, after years and years of legal battles, Altria claims that it has only paid $108 million dollars in charges.  When considering how often tobacco companies get sued and how long Altria has been around, this number is unbelievably small.  Clearly, Altria has a great legal team.  In response to worries about federal and state governments banning cigarettes or imposing extremely harsh restrictions, my first response is that Altria has been dealing with harsh restrictions for a long time and continues to be successful.  Smoking in restaurants and bars has been banned in over 20 states, and Virginia (both Altria’s and tobacco’s home state) just recently joined the list of states banning smoking in restaurants.  Another thing to consider is that tobacco is a heavily taxed product, and it would be detrimental for state and federal budgets to ban smoking or even severely restrict its use.  For these reasons, I believe that worrying about litigation issues or harsh government bans are a little overblown, and should not scare away investors. 

Altria was the best performer in the S&P 500 for the 50-year period from 1957 to 2007, and I think that it is such a great company that this trend should continue into the future.  With a high dividend and a huge market share in the extremely stable domestic tobacco industry, Altria is a great defensive play for this recession.  But, with its acquisition of UST and the emerging popularity of smokeless tobacco, I think Altria has some great long-term growth prospects.  If you had to buy one stock right now for both the short-term and the long-term, I urge you to strongly consider Altria.

 

Niki Pezeshki

College Trillionaire