Altria's Flameout

If you recall, I wasn't exactly thrilled with Altria's (NYSE: MO  ) earnings report last quarter, and I'm even less impressed following the company's third-quarter report yesterday. To me, it appears that Altria is content in giving up on growth and is simply going to dig its heels in and make its last stand as a dividend-income provider in order to keep shareholders happy.

For the quarter, Altria reported revenue of $4.33 billion, excluding excise taxes, and net income of $0.57 per share, more than 3% higher than the year-ago period. While these figures might seem tame, it was the company's outlook and the quality of its quarterly earnings that have me running in the other direction screaming, "Fire!"

Even going into this quarter with the understanding that cigarette shipment volume would be down based on the company's forewarning of this last quarter, the magnitude of the drop was much more than anyone anticipated. Cigarette sales dropped a whopping 9% for the quarter with its Marlboro brand leading the charge lower. Only Altria's discount brands saw a rise in shipment volume -- but that made little difference with discount brands only making up about 7% of all volume.

More concerning is the loss of market share for the company's premium brand, Marlboro. Economic uncertainty, high unemployment levels, and increased U.S. government programs designed to heighten awareness about the dangers of smoking are all working against Altria in a big way. Although Altria still controls around 50% of U.S. market share, it's disconcerting that its premium and highest-margin Marlboro brand lost so much market share over the year-ago period.

Not everything is a complete loss, however, as the company raised its dividend by 7.9% in August and completed a $1 billion share buyback program. The company also affirmed that it would seek another $1 billion in share buybacks prior to the end of 2012. But is Altria good for anything other than dividend income? I unfortunately don't think so.

Tobacco producers with foreign exposure including Philip Morris International (NYSE: PM  ) , British American Tobacco (AMEX: BTI  ) , and Universal (NYSE: UVV  ) are able to escape (to some extent) the stringent anti-smoking laws within the U.S. and offer the stability of diversification across multiple geographic regions. Altria, along with Lorillard (NYSE: LO  ) , Vector Group (NYSE: VGR  ) , and Reynolds American (NYSE: RAI  ) , are fighting a losing battle against the U.S. government for a shrinking piece of the U.S. tobacco market.

Looking ahead, Altria anticipates laying off about 15% of its workforce in response to declining sales and is taking an impairment charge of $75 million in the fourth quarter. Investors may have reached the butt of this investment, and now may be the opportune time to toss this one to the curb.

What do you think? Are Altria's best days behind it or are pessimists like me blowing smoke? Share your thoughts in the comments section below and consider adding Altria to your free and personalized watchlist to keep up on the latest news with the company. Also, I invite you to get your free copy of The Motley Fool's latest report, "Secure Your Future With 11 Rock-Solid Dividend Stocks." Why be a slave to declining sales when you can own these 11 companies instead?

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. The only thing he has been known to smoke is his tires. You can follow him on CAPS under the screen name TMFUltraLong and on Twitter where he goes by the handle @TMFUltraLong. The Motley Fool owns shares of Altria and Philip Morris International. Motley Fool newsletter services have recommended buying shares of Philip Morris International and creating a bear put ladder position in Lorillard. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (6)

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  • Report this Comment On October 28, 2011, at 1:35 PM, mm5525 wrote:

    At the very least MO owns roughly a third of SMBRY which will always make MO a very safe investment with at least some growth. My view is PM is by far the better stock in this space. PM is the international version of MO, selling the Marlboro brands and other brands overseas, and not only does PM show growth and lots of it, they raised their dividend by 20.3% last quarter. 5 billion in buybacks per year.

    I view MO as a safe place to park money. Same as MSFT or CSCO basically. An incredibly recession-proof stock to own in times of turmoil. I owned MO for over a decade but sold to put all proceeds into PM due to the anti-smoking regulations in the USA and that very decline in smoking rates.

    Smoking is increasing in the Asia-Pac region. Dramatically.

    Just my 2 cents.

  • Report this Comment On October 28, 2011, at 1:44 PM, stones1962 wrote:

    I agree,MO will be here in 20 years or more,the flame will keep producing. Low Beta.

  • Report this Comment On October 28, 2011, at 3:35 PM, ByrneShill wrote:

    I own both MO and PM, and I like them both, but it seems like most people make a huge mistake in thinking that PM is protected from regulations.

    On one side, MO is operating in a very regulated environment, and it is priced in the stock price. I don't think the US govt can impose much more regulation. Maybe even less in the future (actually, if pot is ever legalized, US tobacco companies stand to gain quite a bit). And the low amount of smokers could really be a floor.

    On the other hand, PM operates in a market that's almost unregulated (actually, the amount of regulation varies from market to market, but on average it's less than in US). The amount of regulations has nowhere to go but up. In some countries, it seems like everyone smokes, so the markets can only shrink.

    What happens to PM is asian governments start regulating, if not outright banning tobacco? At this point, regulatory-wise, it can't get much worse in US, but it can't get much better in asia-pac.

  • Report this Comment On October 28, 2011, at 6:09 PM, xetn wrote:

    China has at least 25% of the the world's smokers, but most of them smoke Chinese branded cigarettes. While you can see PM brands in many of the stores, you don't see many buyers.

    Although the Chinese government has been trying to reduce the number of smokers by banning smoking in certain places, it still remains a place where people smoke in restaurants and many other places.

    There is no minimum age for buying cigarettes in China and many kids smoke. (There is no minimum age for buying alcohol either).

    I don't know if there are any companies trading in China that are primarily tobacco sellers, but if so, they might compete well with PM and others.

  • Report this Comment On October 30, 2011, at 6:32 AM, ehelpies wrote:

    I've owned MO, PM as only MO since 1965. The splits and the dividends have been, shall I say - overwhelming, to say the least. Obviously, smokeless tobacco products are increasing as I write, while cigarette sales reduce; perhaps - 3% per annum.

    Once unemployment turns the corner, sales of cigarettes and other products will go up. And, we are forgetting that Altria purchased UST, Inc via new investors buying bonds. They were smart enough to do it via OPM and kept their billions, visa vie - buting back shares of stock plus increasing dividends, which, by the way, not a common thing among equities in general.

    Moreover, as we get closer to 2018, MO will once again have strengthened their non-tobacco holdings, perhaps acquiring smaller companies to strengthen their overall holdings; and THEN - breaking out the UST type company, which in the very long run will return the former and the present MO to 'one helluva' stock. What makes me think Mo will eventually separate the UST from the overall MO, well - we will just have to wait and see if I'm correct. Buy MO now, while it's cheap. For every 2 to 3 shares I own of MO and PM, I buy/own VGR shares. And I've owned VGR way back when... Buy VGR, while they are cheaper than cheap. Sit back and smoke what is written. Have fun counting your dividends folks! I do/will.

  • Report this Comment On October 31, 2011, at 6:19 PM, pepijndk wrote:

    people thinking PM is better protected against regulatory onslaught and other risks as opposed to MO are wrong. Take it from an overseas investor. There are 2 huge threats to PM:

    1. Regulatory: PM faces plain packaging as of next year in Austalia and before the end of the decade accross the EU. This will commoditize cigs as new smokers will simply choose the cheapest brand, not the one the cool guys smoke. This alone will end up decimate 40% of PM's current earnings. Most likely, MO will be able to lobby successfully against that in the US.

    2. In Asian markets regulatory headwinds are less likely, and these markets form the wildcard for PM. Yet, these markets are equally worrisome given weak ownership rights, weak rule of law and widespread corruption. Yes, Marloboro sales are growing accross the region, but PM isn't going to be the one selling them. Pm made the stupid mistake of absolutely wanting to get into China (a monopolized marked) in a JV with the gvmt monopoly. They were even more stupid to start a local production site a few years back. Result is there are now shrewd individuals in China who can perfectly produce a Marlboro flooding all Asian markets with cheap contraband. In the US, a tobacco company is well protected against such; not so in any Asian country. Basically PM is a foreign owned company who's interests are no one's concern in Asia.

    Throw in a trade war and expropriation of US owned assets in a retaliatory strike and PM could prove to be a much much more risky investment then MO.

    Just my 5 cents...

    I think valuations for both companies are lofty. But I look fwd to the day MO can't raise it's dividend and its stock plunges, as that day I will certainly step back in. In principle cigs remain one of the best investments ever, proof of which Mo's ever rising dividend in spite of all the headwinds over the past 10 years.

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