Altria Is Smokin'

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Altria Group (NYSE: MO), home of tobacco giant Philip Morris and majority owner of food giant Kraft Foods (NYSE: KFT), turned in a tremendous fourth quarter. Revenues were up 10.2% and net earnings, 18.3%. Talk about smokin' results.

For the full-year 2003, earnings declined from $5.21 in 2002 to $4.52. That sure sounds bad, but remember, 2002 results included a $0.81 per-share gain from the sale of Miller Brewing. Back that out, and 2003 was another step forward.

The highlight is tobacco -- especially domestic sales. Premium leader Marlboro's market share jumped from 37.4% last year to 38.5%. Overall, Phillip Morris, which bumped its total share from 48.1% to 49.1%, now accounts for nearly one of every two cigarettes sold in the U.S. That's a lot of smokes and, with premium-priced Marlboro out front, a lot of cash.

International sales inched a meager 1.6% higher, but in this case, the year-ago quarter benefited from a strong shipment to Japan and other markets hurt by the dock strikes in the prior quarter. Either way, operating income increased a hefty 8.2% for the latest quarter.

One might make the case that Phillip Morris will continue to grow its market share in the fashion of global beer powerhouse Budweiser (NYSE: BUD). To be fair, one might as easily insist that the pending combination of R.J.Reynolds Tobacco (NYSE: RJR) and British American Tobacco's (AMEX: BTI) Brown & Williamson gives pause.

So, which is it? When you get right down to it, the new R.J. Reynolds may control 30% of the tobacco market, but it lacks a dominant brand like Marlboro. Moreover, R.J. Reynolds already is battling declining sales, and both it and British American Tobacco are burdened with restructuring charges.

Granted, with $19 billion in long-term debt, Altria has a rarified 95% debt-to-equity ratio. Granted again, investors must weigh handsome operating margins (approaching 16%) against legal risks (a whole topic unto itself), not to mention the fact that, including dividends, the stock has increased 46% since year-end 2002.

Still, if you ask me, for investors looking for a piece of the highly profitable tobacco business, Altria is it. At a relatively meager 12 times earnings, and yielding 4.9%, the stock still looks reasonably priced -- especially given that the company is increasing market share and profitability.

When it comes to tobacco, Altria blazes the competition.

W.D. Crotty is a former Brown & Williamson Tobacco employee and knows the tobacco business. Tobacco stocks are great for yield investors. If dividend -paying stocks interest you, consider a 30-day free trial to the Motley Fool Income Investor .