Has Altria Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Altria (NYSE: MO  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • 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 mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. 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%

2.8%*

Fail

 

1-Year Revenue Growth > 12%

4.2%

Fail

Margins

Gross Margin >
35%

55.2%

Pass

 

Net Margin > 15%

25.7%

Pass

Balance Sheet

Debt to Equity < 50%

317.8%

Fail

 

Current Ratio > 1.3

1.34

Pass

Opportunities

Return on Equity > 15%

98.8%

Pass

Valuation

Normalized P/E < 20

15.44

Pass

Dividends

Current Yield > 2%

5.2%

Pass

 

5-Year Dividend Growth > 10%

8.7%*

Fail

       
 

Total Score

 

6 out of 10

Source: S&P Capital IQ. Total score = number of passes. * ince 2008 spinoff of Philip Morris International.

Since we looked at Altria last year, the company has dropped a point, with slowing dividend growth as the culprit. But the shares have done nicely, rising almost 25% over the past year.

Altria has been an amazing performer over the past decade or so, rebounding from litigation worries at the turn of the millennium and sustaining its dividend payout throughout. With spinoffs of Kraft and Philip Morris International (NYSE: PM  ) , the surviving company's U.S.-based business is still producing enviable quarterly payments for shareholders.

But not everyone's thrilled about Altria's prospects going forward. Fool contributor Sean Williams notes that ongoing offensives from the FDA and the Centers for Disease Control have renewed efforts to encourage smokers to quit. Despite a successful lawsuit from Lorillard (NYSE: LO  ) and Reynolds American (NYSE: RAI  ) to block new packaging requirements that would have inserted huge warning graphics on cigarette packs, Altria and its peers still face pressure that isn't likely to go away. Moreover, because of the lingering weak economy, many smokers have moved away from premium brands toward discount cigarettes from Vector Group (NYSE: VGR  ) and other lesser-known tobacco companies, and that has already led to major layoffs at Altria.

Interestingly, although many shy away from investing in tobacco companies because they consider them ethically questionable, Altria won recognition from two leading publications for its social responsibility. With extensive philanthropic efforts, Altria tries to offset the bad reputation it has among tobacco opponents.

For Altria to improve, it will need to find ways to grow despite an adverse climate for tobacco generally. That's going to be an uphill battle, leaving investors perhaps to deal with an imperfect stock that still pays an attractive dividend.

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.

Altria may not be perfect, but we've got some other ideas you might like better. Let me invite you to learn about three smart long-term stock plays in the Fool's popular special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.

Click here to add Altria to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. 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 Fool has a disclosure policy.


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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 08, 2012, at 5:08 PM, runningoutofcash wrote:

    +The author fails to mention that Altria Group (MO) controls 25% stake in SABMiller (2nd largest Beer Company in the World)....which possibly is valued at 15b.

    +Big_MO controls 50% of the Smokes market.

    +it costs 10cents to make a pack of cigs...and sells for $5/pack........go figure !!!

    + Much talk about Altria Group (owns a lot of REAL Estate) ...teaming up with the GOVT ; in reference to the Medical Marijuana Business ...thus possible news after the elections..

    my say : $40 by the end of the year !!!

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