Why We're Buying Altria

The video below is part of The Motley Fool's "11 O'Clock Stock" series where we recommend a new stock every weekday at 11 a.m. ET on Fool.com over the next 50 weekdays. To see a video of co-founder Tom Gardner explaining the series, click here. To see our original recommendation of Altria (NYSE: MO  )  click here.

Due to smoking bans and health consciousness, cigarette usage in the U.S. is on the way down at a rate of 3%-4% a year. Still, Fool.com analyst Anand Chokkavelu, CFA, sees opportunity in the sector. Click on the video below to hear his rationale on Altria, and why it's a stock that deserves your attention.

Investors looking for high yields have to search more than normal. With money in good savings accounts yielding about 1% and 10-year Treasuries yielding around 3%, dividend stocks are more attractive than normal. And Altria's yielding 6.3%. Since Altria makes tobacco products, a lot of investors stay away from Altria and its competitors Reynolds American (NYSE: RAI  ) and Lorillard (NYSE: LO  ) . They either fear the litigation risk or aren't too keen to own a sin stock. But those who can stomach these concerns are buying into a company with a 50% market share in cigarettes, a dominant position in smokeless tobacco, and some exposure to beer and wine business.

Cigarettes are far and away Altria's main sales source. And with a 42% market share by itself, the Marlboro brand has a moat comparable (or better) than the products of the blue chips of consumer goods: Procter & Gamble (NYSE: PG  ) , Coca-Cola (NYSE: KO  ) , and Johnson & Johnson (NYSE: JNJ  ) .

However, the annual 3%-4% cigarette volume drop in the U.S. certainly crimps Altria's growth prospects. Those looking for more growth should look to Altria's sister company, Philip Morris International (NYSE: PM  ) , which runs all markets outside the U.S.

That said, Altria has an ace up its sleeve. Cigarettes are the example every economics professor uses to explain inelastic demand to his students. Basically, this means that Altria can increase its prices without losing too much demand for its products. So even though cigarette volume has been going down, Altria's been able to more than make up for it with price increases.

So, in Altria, you're getting a big dividend payer who can support these payments with its huge brand names and pricing power.

Anand Chokkavelu owns shares of Altria and Philip Morris International. Coca-Cola is a Motley Fool Inside Value recommendation. Philip Morris International is a Motley Fool Global Gains choice. Johnson & Johnson, Coca-Cola, and Procter & Gamble are Motley Fool Income Investor picks. The Fool owns shares of and has Write Covered Calls on Procter & Gamble. The Fool owns shares of Coca-Cola and Johnson & Johnson. The Fool has a disclosure policy.


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  • Report this Comment On August 02, 2010, at 4:19 PM, mdtopper wrote:

    Nice piece. But as I remember from school, demand can be inelastic but ONLY WITHIN A RANGE. Once the pricing becomes too high, demand, even for addicitve products, will surely shrink. But what is too high?

  • Report this Comment On August 02, 2010, at 11:32 PM, baldheadeddork wrote:

    Maybe I've been watching too many reruns of The Wire, but I think the price of this addictive product would have to go a lot higher than $5 a pack to drive users away.

    Hey, maybe that's a marketing angle; "Marlboro - still the best value in addiction"

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