Why Altria Will Remain a Solid Long Term Investment
John is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Looking at Altria (NYSE: MO) as a company, I have continued to watch them grow and have been very impressed with leadership. This is one management team that is forward looking. I believe they are continually under pressure in the United States as our government strategizes different regulatory practices to attempt to put the tobacco revenue base out of business.
Here are just the latest challenges the company faces from our government:
- The Center for Disease Control and Prevention unveiled a $54 million plan to attack the tobacco industry.
- The FDA wants the tobacco makers to report the quantity of 93 chemicals in their products. The FDA has decided that it will compile information for each product and make them available to the public by April 2013
- In June 2011, the FDA ruled that tobacco companies in the UShad to include that all cigarette labels include a warning that covers the top 50% of a cigarette pack's front and back panels.
This last regulation if initiated could bring a great blow to the industry. In 2000 Canada initiated a similar law and saw the smoking rate drop 6%. This brings up concerns for me as an investor. A company like Altria sells in the United States alone.
Altria is not alone in this. Lorillard, (NYSE: LO) the third largest tobacco company in the U.S. is well known for brands like Menthol Newport brand and claims about 11% of the U.S. market. They are also facing this regulatory challenge, but are forecasted to grow more than Altria over the next year. The Newport brand has been about 33% more profitable per 1000 cigarettes than Altria’s brands. So it is understandable why it would be projected to grow faster. Also, there is pure economy of scale. Whereas Altria owns 50% of the tobacco market, it would be harder for them to find ways to grow than a smaller company like Lorillard.
What Altria has going for it is diversification. This is what impresses me with the forward looking management team. Even though tobacco is the big revenue producer for the company, management knows it needs to diversify to survive an aggressive government that I believe is bent on stopping revenue from the sales of tobacco products.
It has been in the wine business. Altria produces and sells the Chateau Ste. Michelle and Columbia Crest names, as well as distributes Antinori wines, Villa Maria Estate wines and Champagne Nicolas Feuillatte. This generates revenue. They also are the largest shareholder of SABMiller, one of the world's largest beer and bottling companies. The company bottles internationally for Coca Cola, Miller Genuine Draft and several lines of Italy's Peroni beer.
As time progresses, Altria will continue to remain a good long term growth company with a solid 5.3% dividend. A good management team that sees the need to diversify to survive will keep Altria a good value for years to come.
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