A Kraft-Free Life for Altria

Yesterday, tobacco juggernaut Altria (NYSE: MO) said that earnings per share fell by a whopping 21%. But I'll keep holding onto my shares. Here's why.

During the quarter, the company rid itself of Kraft (NYSE: KFT), which was essentially dead weight and becoming a drag on the stock's potential. The decrease in Q1 profits is largely attributable to an effective tax rate of 33.5% during the quarter, which was significantly higher than the 12.8% rate in the year-ago quarter. The drop is also due in part to lower results at Kraft.

Net revenue during the quarter actually increased by 8.2% to $17.6 billion, driven by the company's international tobacco results. Altria's U.S. tobacco business realized retail share gains for its premium brands Marlboro and Parliament.

In November 2004, Altria CEO Louis Camilleri noted at Morgan Stanley's Global Consumer Conference that it was "obvious that we are looking at a number of alternatives to maximize shareholder value, including the separation of the company into two, or potentially three, strong and independent entities." In this most recent quarter, the international tobacco division saw its operating income increase by 9.5% to $2.2 billion. While it's mere speculation at this point, a potential future split-off of the two divisions could result in a higher valuation for the international division.

There are two key reasons why I continue to own this stock. One is that its current dividend-yield of close to 5% is consistently in the 4% to 5% range. The second is the relative inelastic demand for cigarettes. While Altria might have to face price competition from other tobacco sharks such as Reynolds American (NYSE: RAI), Carolina Group (NYSE: CG), and British American Tobacco (NYSE: BTI), ultimately this industry as a whole is a moneymaker. You don't typically see sharks eating other sharks, and in this instance, the consumers of these company's products are in many cases dependent upon the products that are produced regardless of their price.

Historically, the biggest risk to owning these stocks has been litigation risk. That risk has died down a bit over the past couple of years as the industry has experienced a series of resounding victories in the court room. The prospects of Altria deciding to split its domestic and international cigarette divisions as part of an overall restructuring plan first announced in 2004 is just another added incentive to hold onto this stock for the long haul.

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Fool contributor Billy Fisher does own shares of Altria and Reynolds American. The Fool's disclosure policy is smoke-free.