Is Altria's Rally coming to an end?

By Lior Cohen - July 19, 2012 | Tickers: MO, PM | 0 Comments

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I see there are a growing number of articles written by people who believe the ongoing rise in Altria's (NYSE: MO) stock price won’t last long and, between the lawsuits fines and the bans on smoking, Altria's financial situation might eventually deteriorate. I don't subscribe to this sentiment and think that even though the company might not grow as it did in the past, Altria's stock price will remain robust. Let's examine this issue.    

Altria was separated from Philip Morris International (NYSE: PM) during 2008, so that it is concentrated in the American market while Philip Morris International sells to countries outside the U.S. There were concerns that this separation would adversely affect Altria's stock price because of the many legal fines, growing restrictions, and settlements Altria must pay off.

This wasn't the case. During the past several years, Altria has outperformed the S&P 500 index. The chart below shows the price movements of Altria vs. the S&P 500 index, normalized to the beginning of 2008. The chart shows how Altria's stock price more than doubled, even with the company offering a high dividend; the current dividend yield is 4.7%.

One of the main issues that concerns people over the future of Altria is the decline in the number of smokers in the U.S. This comes after new smoking bans were added that make it harder for people to smoke in public. According to the American Nonsmokers' Rights Foundation, as of July 1^st, 2012, 81.1% of the American population lives under a ban on smoking in "workplaces, and/or restaurants, and/or bars, by either a state, commonwealth, or local law."

Further, according to the CDC, as of 2010 nearly 45.3 million adults, or 19.3% of the adult population, are smokers. This rate is lower than it was in 2005; back then the rate of adult smokers reached 20.9%. This decrease might make it seem as if there was a decline in the number of smokers, but it's not. Keep in mind there is an average annual population growth rate of 1%; this growth rate keeps the number of smokers steady. After all, during 2005 the number of smokers reached 45.1 million adults, very similar to the number of smokers in 2010.  

This means despite the many restrictions that were added by the states throughout the years, the numbers of smokers remained nearly unchanged. Not only are there not fewer smokers but the price of cigarettes also continued to rise in order to pay for all the high end lawsuits.

The lawsuits, fines, and settlements the company is currently paying have reduced the uncertainty around Altria's future. Further, the high lawsuit fines the company has been paying haven't seemed to deter investors in the past few years. Also note that the company's operational profitability remained stable in recent years, as it ranged between 23% in 2009 and 26% in 2010 (in 2011 the profitability reached 25%).

On the other hand, the many lawsuit fines, the new bans on smokers, and the decline in the percent of adult smokers do reduce the possibility of growth for Altria.  

The Foolish bottom line:

The company has been doing well and will continue so as long as the number of smokers doesn't fall. There might eventually be some slowdown once the population growth no longer compensates for the decline in adult smokers. Nonetheless, in the near future the company's performance and high dividend yields are likely to keep the stock rising. 

For further Reading: Is Exxon Due for a Rally?

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