This Company Is Smokin' the Market

Putting all of your investing eggs in one basket can be a risky move. But if you had to choose just one stock to own, which would it be?

That's a tough decision, but you could turn to Ben Bernanke for a clue. When he was sworn in as Federal Reserve chairman in 2006, his portfolio consisted of just one company's stock: Altria Group (NYSE: MO  ) .

Despite its lack of high-flying growth status or a glamorous line of products, the company has been a solid performer for years. It has generated generous levels of free cash flow and a 31.5% return on equity in just the past 12 months.

Slow and steady
Altria is the parent of a range of companies -- mainly cigarette manufacturers through its Philip Morris USA and Philip Morris International (NYSE: PM  ) subsidiaries, which make one of the world's most iconic brands: Marlboro.

Tobacco is a pretty boring industry to be in. Today's cigarettes aren't too different from your grandfather's cigarettes, and they won't be too different from your grandchildren's cigarettes. Nonetheless, average returns over the past 80 years have been, shall we say, smoking. In a recent book, author Jeremy Siegel noted that Altria had averaged 17% in returns per year from 1925 to 2005 while the market returned an annualized 10% in the same time frame. How could a boring company outpace all of its peers by such a wide margin?

It won't win any awards for innovation, but Altria takes the cake in producing something much more important to shareholders: cash. And since it doesn't need all of that cash to fund huge research-and-development campaigns, it's been able to put a tidy chunk of that cash directly back into shareholders' pockets through massive dividends and share buybacks.

Show me the money

Company

10-Year Annualized Return

Dividend Yield

Altria Group

6.8%

4.06%

Colgate-Palmolive (NYSE: CL  )

7.8%

2.1%

Procter & Gamble (NYSE: PG  )

6.5%

2.0%

Kimberly-Clark (NYSE: KMB  )

2.9%

3.6%

Coca-Cola (NYSE: KO  )

(1.9%)

2.5%

As impressive as Altria's returns are, I think things are about to get even better for the company. After spinning off Kraft Foods (NYSE: KFT  ) last year, the company has now split from its Philip Morris International (PMI) division. Altria is now left with Philip Morris USA, a 28% share of SAB Miller, cigar maker John Middleton, and a money-management segment.

Why is this good news? With Altria having undergone a barrage of lawsuits regarding its domestic cigarette business over the past 20 years, investors have had the heebie-jeebies about the company. So, to maximize shareholder returns, management has decided to break the company apart.

The breakup is likely to end up being a boon for shareholders. For starters, Altria will shed more than $1 billion per year in overhead costs. Management forecasts future annual returns, including dividends, to be around 12%. When you consider the amount of uncertainty surrounding the rest of the market versus the stability and predictability of the tobacco industry, those returns look pretty darn enticing.

PMI will probably fare even better, now that the Marlboro man is free to roam the globe without the regulations it faced when attached to Altria. Even though it's already a colossal company -- it shipped more than 850 billion cigarettes last year -- there's still plenty of growth potential. It stands at either No. 1 or No. 2 in 19 of the top 30 global markets, yet it has barely touched China, India, Bangladesh, or Vietnam, which collectively consume more than 2.3 trillion cigarettes each year. You saw that right: Trillion.

In December, PMI inked a deal with China National Tobacco, or CNTC, which will allow it to begin producing Marlboro cigarettes in CNTC's Chinese factories. That'll pave the way to penetrate some of CNTC's mammoth 90% stronghold on the Chinese cigarette market.

Clearly, PMI has some pretty optimistic growth prospects around the globe. After the spinoff, it'll be a sleeker, more streamlined company than it's been with Altria. Without being tied to its domestic sister company, Philip Morris USA, PMI will probably have an easier time nudging its way into foreign markets that have been less than chipper about doing business with Americans in the past.

Add it all up, and you've got a pretty lucrative scenario: an iconic brand, strong products not reliant on changing innovation, incredible cash flow, steady growth, and international exposure -- all wrapped up in what has been the single-best-performing stock the market has seen over a 50-year period. It doesn't get much sweeter than that.

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