Altria: Snuffed Out or Still Flickering?

If kissing someone who smokes is like licking an ashtray, then investing in the U.S. arm of Big Tobacco is akin to boarding a slowly sinking ship.

Nonetheless, judging by the market's initial reaction, it appears that market leader Altria (NYSE: MO  ) continues to win over easily impressed investors.

And indeed, there were encouraging aspects to Altria's first-quarter results.

On a reported basis, earnings per share jumped nearly 40%, to $0.39, although the adjusted gain came in at a lesser 7.7%. Bottom-line growth was driven by cost cuts, lower expenses related to the acquisition of smokeless-tobacco specialist UST, and higher earnings from Altria's equity stake in global beer giant SABMiller, among other factors.

At this point, Altria investors are no doubt familiar with the company's strategy of growing profits by boosting operating efficiency. In 2009, Altria cut $389 million in costs. In the recently completed quarter, management shaved off $43 million in expenses. And by 2011, the company expects to have achieved a total cost reduction of $1.5 billion, versus 2006 levels.

But what then?

Cigarette volume continues to decline. Adjusting for inventory shifts leading up to April 2009's federal cigarette excise tax hike, the recent quarter's volume fell roughly 11% (even without the adjustment, volume slipped by 0.7%). Yet today's economy is almost inarguably on firmer ground than it was a year ago. That consumers are nonetheless purchasing fewer Altria smokes underscores the extent to which the industry is beset by structural, rather than cyclical, decay.  

Die-hard Altria fans might counter by noting the company's growth potential in smokeless products, where brands include Skoal and Marlboro Snus. Well, let's see. After adjusting for tax-related inventory dynamics, promotional offers, and other factors, segment volume did rise about 5%. Trouble is, these products recently accounted for only 12% of companywide operating income, which means that segment growth is unlikely to fully offset declines in the much larger cigarette business. So overall, you've still got a company with eroding fundamentals.

But I know that, like a pack of Marlboro Reds placed perfectly at eye level behind the counter, Altria's 6.6% dividend yield demands at least a moment's attention. While one could argue that Altria's payout is safer than the double-digit yield of mortgage specialist Annaly Capital (NYSE: NLY  ) , investors need also to note the rate at which dividends are increased.

Here, Altria's most recent dividend boost was a mere 2.9% -- well below the high single-digit increases of the recent past. That increase moves the payout ratio from about 75% to roughly 80% -- in line with management’s recent guidance. But this latest increase came just eight months after the prior one, and in August the company had lifted the divvie by more than 6%.

For contrast, consumer-packaged-goods company Procter & Gamble (NYSE: PG  ) just raised its dividend an inflation-trouncing 9.5%, while a diverse group including Wal-Mart (NYSE: WMT  ) , CSX (NYSE: CSX  ) , and Home Depot (NYSE: HD  ) recently raised payouts anywhere from 5% to 11%.  

But if your portfolio just can't kick the tobacco habit, at least consider trading up to Philip Morris International (NYSE: PM  ) , where fundamentals indicate the possibility of something other than a slow and painful demise.

Editor’s Note: In a previous version of this article, the Fool erroneously suggested that Altria’s recent dividend increase was the company’s sole annual increase, when the company had, in fact, two increases over the past year . The Fool regrets the error.  

The Home Depot and Wal-Mart Stores are Motley Fool Inside Value recommendations. Philip Morris International and SABMiller are Global Gains selections. Procter & Gamble is an Income Investor pick. Try any of our Foolish newsletters free for 30 days.

Fool contributor Mike Pienciak holds no financial interest in any company mentioned in this article. The Fool has a disclosure policy.


Read/Post Comments (12) | Recommend This Article (18)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 22, 2010, at 2:07 PM, w2j2 wrote:

    What if the U.S. legalizes marijuana?

    Would that benefit MO?

  • Report this Comment On April 22, 2010, at 2:14 PM, madmilker wrote:

    with a 6.5% dividend...it's bout as far from flickering as one can get....

    dang! I heard last week they investing into lifeboats in order to rescue everyone on Wall Street and Main Street when that $57 trillion of debt pops to the top of the Hudson River as Lady Liberty kneels down on one knee and shouts out....

    Retail makes nothing!

  • Report this Comment On April 22, 2010, at 2:23 PM, Usurped wrote:

    Oh such cutting edge fact analysis. Using the Ford/GM/Chry. longitutial (sp) extrapolation, MO should take its last dying gasp (pun intended) in about 2093. I'll wait it out.

  • Report this Comment On April 22, 2010, at 2:24 PM, ByrneShill wrote:

    Hmm, at some point the volume will stop falling. Unless you think everyone will stop smoking in US. Personnaly I don't think it's gonna happen.

    As far as the regulatory environment goes, I think the US is as regulated as it can be without prohibiting tobacco (and that won't happen).

    If pot is legalized (I highly doubt it's gonna happen), big tobacco will be the first to capitalize on it. We might be looking at a 20-25% revenue growth overnight, at the same or maybe higher margins than tobacco.

    EPS growth can also be sustained a bit by share repurchase.

  • Report this Comment On April 22, 2010, at 3:12 PM, financeguy85 wrote:

    The point regarding Altria's dividend is not entirely accurate. Yes, their most recent increase was a penny, from .34 to .35, but the author should note that this was the company's second increase in the last four quarters. They increased the dividend from .32 to .34 last June. Therefore, over the last 12 months the dividend has increased a total of .03, or 9.375% Altria continues to be an excellent dividend growth stock.

  • Report this Comment On April 22, 2010, at 3:39 PM, financeguy85 wrote:

    The author's point about Altria's dividend is only partially accurate. Yes, their most recent increase was a penny, or 2.95%, but it is appropriate to note that this was the second increase in the dividend over the last year. The company increased the dividend from .32 to .34 in time for the September distribution. Therefore, over the last four quarters, Altria has increased their dividend a total of .03, or 9.375% That kind of an increase in one of the worst financial climates ever certainly does not indicate a company in a "slow and painful demise."

  • Report this Comment On April 22, 2010, at 3:45 PM, financeguy85 wrote:

    Apologies for the double-post.

  • Report this Comment On April 22, 2010, at 3:49 PM, scdelaney wrote:

    Altria's recent (March) dividend increase of 2.9% was out of cycle. Historically MO raises the dividend in September and I would think this September we'll see another increase. The 2.9% wasn't a joke it was a surprise.

  • Report this Comment On April 22, 2010, at 5:11 PM, plange01 wrote:

    altria is doing great...super dividend!!!

  • Report this Comment On April 22, 2010, at 5:44 PM, TheVAGent wrote:

    I agree with scdelaney, except for the timing. What Mike Pienciak overlooks is that MO typically increases the dividend like clockwork at the annual Board Meeting the last week in August.. Expect another $0.02 or maybe even a $0.03 increase announcement in late August for payment in the first half of October. I'll bank that raise every year.

  • Report this Comment On April 22, 2010, at 7:09 PM, stanley85258 wrote:

    Smokers will pay almost anything for Altria products,

    taxes and all! The author forgets Europe where a pack

    of 20 cigs. is between $10.00 and $14.00 and the tobacco companies not only survived but increase their profits year after year. Habit is hard to break,ask your dear pres. Obama.

  • Report this Comment On April 22, 2010, at 7:45 PM, Nickalisk wrote:

    @ stanley

    I think Eurpoe would fall under Phillip Morris Intl (PM)

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