Altria's Smoke Signals

Even though cigarettes make you cough and splutter, that's no excuse to ignore tobacco stocks. Altria (NYSE: MO), the company formerly known as Philip Morris, is the giant among tobacco stocks. Despite hefty class-action suits, heightened government regulations, and bad press, Altria continues to prosper.

Philip Morris, with its Marlboro cigarette brand, represents about three-fifths of Altria's revenues. Sure, tobacco sales are declining in the U.S., but they are rising internationally, and Altria's market share is increasing rapidly. Despite the widely known health risks, plenty of people continue to smoke. Not surprisingly, Altria is a cash-rich business.

The stock has climbed from $33 a share to over $50 in the past year. But Altria still trades at a price-to-earnings ratio of just 13 and carries a sweet dividend yield of 5.3%. Let's say Altria increases its dividend over the next 10 years by 7% annually (the average for the past 10 years was 13% a year). The annual yield in 2014 on the stock you buy now will be a whopping 10%. Even after rising above $50, Altria stock trades at a 40% discount to multiples sported by other members of the Standard & Poor's 500.

Arguably, much of that big discount represents the risk of future litigation. That said, the chance that smokers will pass their poor health on to tobacco companies like Altria and No. 2 industry player R.J. Reynolds (NYSE: RJR) continues to get smaller. Keep in mind that the litigation is almost entirely confined to the U.S., and tobacco companies have won the vast majority of these suits.

The Illinois case involving the issue of "light" cigarettes could be a spoiler in terms of sentiment, but, generally speaking, tobacco has moved off the "front page" of public-health worries. Sure, Altria's discount will probably never disappear, but it should certainly decrease. Like many of the products it pushes, Altria is risky. But it's difficult to shake off this company's lingering appeal.

Love Altria or hate it? Give your opinion on the Fool's Altria discussion board.

Fool contributor Ben McClure hails from the Great White North. He owns no shares of any companies mentioned here.