5 Reasons to Invest in Altria
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Spin-offs are normally a hidden source of market beating investment returns. Following a spin-off management is able to realign its focus on by targeting their efforts on the business which they know best. The outperforming returns are typically observed for the new spin-off entity as well as the parent company; the benefits of clearly defined management focus within the specific business are felt across both of these groups. Altria Group (NYSE: MO) had 2 major spin-offs in 2007 and 2008 of Kraft Foods (NASDAQ: KRFT) and Philip Morris International (NYSE: PM), respectively. Once Kraft became an independent company, it has returned 21% to shareholders, outperforming the market by a net 24%. Likewise, following the spin-off of Phillip Morris International, the international cigarette manufacturer has realized capital gains of 72% in comparison to the markets measly 1.5% increase. Finally, looking at Altria Group’s performance in the years following the spin-offs, the parent company has outperformed the S&P 500 by a cool 60%. Overall, management has done a tremendous job at creating shareholder value.
However, with solid historic performance, does Altria Group have enough steam left to continue on with its upward climb? Most likely.
Diversifying its Business
While 87.9% of Altria’s income comes from the cigarette sales, the corporation has been diversifying into new markets, including smokeless products, cigars, wines and financial services. In 2009, Altria acquired UST Inc. whose primary sources of business include manufacturing moist smokeless products and premium wines. Furthermore, Altria holds a 27% voting and economic interest in SABMiller, diversifying its exposure away from the core yet risky cigarette industry.
Alternative revenue generators continue to be one of management’s top goals, as cigarette regulation continues to burden the industry and smoking is slowly falling out of favor with North American consumers. Electronic cigarettes (e-cigarettes) which have recently come under criticism by health authorities, have been increasing in popularity with the general public who are looking for traditional cigarette alternatives. In 2011 as total cigarette volumes fell by 4% from 140.8 billion units to 135.1 billion, resulting in a net cigarette revenue drop of 1.1%, other products showed modest gains, helping dampen the effects of diminished cigarette sales. Smokeless product sales had an annual top line jump of 4.8%, with a 6.6% increase in Q4, cigar revenues increased at yearly rate of 1.3% and annual wine sales soared by 12.4% (financial service revenues were not reported).
Significant Market Share
Phillip Morris USA, the largest tobacco company in the U.S, is a wholly owned subsidiary of Altria Group, manufacturing and selling the popular Marlboro cigarette. Marlboro brand products have been the largest selling brand for the last 30 years and currently hold a 42% retail share in the U.S. Phillip Morris International also states that Marlboro brand cigarettes are its most popular brand within the 180 countries where it conducts sales operations. Marlboro is the #1 brand in every state and has a higher loyalty rate than any other brand – according to the Altria’s Consumer Analyst Group of New York presentation, 90% of adult Marlboro smokers purchase these cigarettes 100% of the time. When its other premium and discount products are factored in, Altria controls 49% of the retail tobacco market. With a dominant market position in a heavily regulate industry, Altria is better positioned than its competitors to ensure a constant demand for its products.
Additionally, according to Fortune magazine, Altria is ranked as the 4th most socially responsible company (one notch ahead of Stabucks), giving it the #1 spot within the tobacco space. In terms of an overall score, Reynolds American (NYSE: RAI) and Lorillard (NYSE: LO) rank toward the bottom of the social responsibility list among the major tobacco manufacturers.
Creating Shareholder Value
Financial strength is a key investment driver for Altria; the company has increased its dividend 45 times in the last 43 years, offers a solid yield of 5.44% and has outperformed the S&P every year since 2000. Last year the board approved another 7.9% dividend increase and $1.3 billion of shares were repurchased as two $1 billion programs were authorized, further driving shareholder value. Altria offers not only the largest dividend within the tobacco space, but within the entire Food, Beverage and Tobacco Index. Despite the retirement of Altria’s CEO, Michael Szymanczyk, the future prospects for the company appear promising. After a 7.9% jump on adjusted diluted EPS figures, the company is predicting a 2012 earnings growth rate of 9%. Overall, Altria Group has a strong balance sheet with an increasing cash position despite regular hikes in dividends and share buybacks.
Scrolling through Altria’s 10-K, one can’t help but notice that a large component of the filing is dedicated to discussing various litigation risks, trial results and number of pending cases. The cigarette industry is obviously very different than other businesses; most corporate websites discuss how their products are superior and offer consumers a better alternative to the competition, an enhanced service or an ideal dining experience. Altria’s and other corporate cigarette websites are filled with warnings regarding the health impacts of smoking. Right on the main page, Altria offers a link on how to quit smoking; in a way this is equivalent to Amazon providing services which help people fully rationalize a purchase before making an impulse buys. Even brand images have been removed from its investor presentation. Regulation, although beneficial, will continue to be a thorn to the growth potential of cigarette companies. Altria, however, is doing a great job at not letting such measures stop the company from producing substantial shareholder wealth.
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