Is Altria the Perfect Stock?

Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?

One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if Altria (NYSE: MO  ) fits the bill.

The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.

Some of the most basic yet important things to look for in a stock are:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
  • Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
  • Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
  • Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Altria.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 6.4%* fail
  1-Year Revenue Growth > 12% 0.8% fail
Margins Gross Margin > 35% 53.6% pass
  Net Margin > 15% 20.7% pass
Balance Sheet Debt to Equity < 50% 269.5% fail
  Current Ratio > 1.3 1.68 pass
Opportunities Return on Equity > 15% 88.0% pass
Valuation Normalized P/E < 20 14.82 pass
Dividends Current Yield > 2% 6.2% pass
  5-Year Dividend Growth > 10% 12.8%** pass
       
  Total Score   7 out of 10

Source: Capital IQ, a division of Standard and Poor's. *Reflects adjusted figures accounting for spinoffs of Kraft and Philip Morris International. **Annualized dividend growth since June 2008, which was first dividend after Philip Morris International spinoff. Total score = number of passes.

Altria scores an impressive 7. Moreover, even though the company loses points for its lack of strong revenue growth, it's hard to fault Altria for it. With such a large, mature business, it's no surprise that the company falls short on growth numbers.

Altria has gone from a diversified giant to a pure play on the U.S. tobacco market. Having divested itself of Philip Morris International (NYSE: PM  ) and Kraft Foods (NYSE: KFT  ) , Altria is a much different company, and you have to be careful comparing financials from today with previous results. The company now gets all of its revenue domestically. But some things don't change: Cigarettes remain the dominant business segment, accounting for nearly 90% of revenue.

The tobacco business is quite lucrative, with competitors Reynolds American (NYSE: RAI  ) and Vector Group (NYSE: VGR  ) also pulling down healthy profits. With its dominant Marlboro brand, however, Altria sports higher profit margins than Reynolds or Vector. As long as the industry's ever-present legal battles remain relatively dormant, Altria will continue to be a cash-producing machine that has rewarded shareholders for decades.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Philip Morris International is a Motley Fool Global Gains selection. The Fool owns shares of Altria and Philip Morris International. Try any of our Foolish newsletters today, free for 30 days. The Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (19)

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 October 11, 2010, at 11:53 AM, Metaworld wrote:

    Thank you for differentiating between the new and old Altria (someone's been paying attention to previous comments). Because it's now almost a pure tobacco play, I think it will be important to keep an eye on the overall tobacco $ pool. While cigarettes are declining, the total tobacco $ pool is actually increasing because of pricing and smokeless. . While not a significant portion yet, keep your eye on the smokeless as smoking restrictions continue to increase and the FDA gets more involved.

  • Report this Comment On October 11, 2010, at 1:17 PM, TheDumbMoney wrote:

    "Altria has gone from a diversified giant to a pure play on the U.S. tobacco market."

    Yet again on a Fool article on MO, I note that MO owns almost 1/3 of SABMiller, a major international beer company and soda bottler. This is a relatively small portion of what MO is, but it is not insignificant. MO is thus also a play on the international beer business and soda bottling business.

  • Report this Comment On October 11, 2010, at 2:22 PM, jspinnpm wrote:

    I don't think the market is reflecting the true value of Altria, since the UST acquisition. With the completion of UST , Altria CEO Michael Szymanczky indicated the purchase would place the company in a position for future growth. They bought established brands in Skoal and Copenhagen, not to mention Ste Michelle wine, which is doing quite well. Altria is a money MOchine. Best regards, JSpinPM

  • Report this Comment On October 11, 2010, at 8:36 PM, TMFGalagan wrote:

    @Metaworld -

    Thanks for your comments. I think Altria is a great example of how you have to look beyond raw financial statements to understand how a business has evolved over time. Without that perspective, it's easy to draw conclusions that may not accurately reflect where the company is and where it's going.

    best,

    dan (TMF Galagan)

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1328012, ~/Articles/ArticleHandler.aspx, 11/29/2014 1:47:37 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement