Why Unparalleled Brand Strength Makes Altria the Best Tobacco Stock to Buy

For those willing to consider sin stocks, as tobacco companies are more commonly known, the rewards are tremendous. One tobacco company in particular, Altria  (NYSE: MO  ) , has a long track record of enriching shareholders with its industry-leading brand and hefty dividend payments. Its powerful brands place it firmly ahead of Reynolds American (NYSE: RAI  ) and Lorillard (NYSE: LO  ) , and its commitment to growing its dividend each and every year makes it a compelling long-term buy.

The unquestioned industry leader
There are many tobacco companies to choose from, including Reynolds American and Lorillard (NYSE: LO  ) . At first glance, all three tobacco giants seem nearly identical. Altria, Reynolds American, and Lorillard share similar valuation multiples and dividend yields. But beneath the surface, Altria presents a much more compelling investment case.

First, Altria's dominant brands make it the clear industry leader. Marlboro is one of the most valuable and easily recognized brands in the world, and holds a 43% retail share of U.S. smokeable products. Meanwhile, Altria's Black & Mild cigars hold 30% of the retail market, and its Copenhagen and Skoal chewing tobacco together control 51% of the U.S. smokeless product market.

Altria's dominant brands have produced strong results this year, despite widespread declarations that tobacco stocks are dying businesses. Altria's adjusted earnings are up 9% through the first nine months of the year, and 2013 is expected to be a strong year. The company expects full-year adjusted earnings growth of 7% to 9% versus 2012.

This is a distinct advantage Altria has over its closest competitors. There's simply no matching Marlboro's brand strength. Reynolds American and Lorillard's brands are under immense pressure from the ongoing regulatory scrutiny facing menthol cigarettes. In 2011, an advisory committee to the Food and Drug Administration found that removing menthol cigarettes from the marketplace would benefit public health. While an outright ban of menthol cigarettes is unlikely, it's not completely out of the question.

Consider the effect this would have on Reynolds American and Lorillard. Reynolds American has a considerable footprint in menthol through its Kool brand. Lorillard would be even harder hit, since its Newport brand is the top-selling menthol brand in the United States and makes up 88% of the company's sales.

Shareholder rewards that are second-to-none
Altria's dividend stands above its competitors. Reynolds American and Lorillard provide 5% and 4.3% yields, respectively, which are below Altria's 5.2% yield. Plus, Altria has a dividend track record that places it in rare company. Altria has increased its dividend 47 times in the last 44 years.

Not only did the company increase its dividend earlier this year, but it also pledged to return even more cash to shareholders in the form of additional share buybacks. Along with its dividend raise, the Altria recently announced a $700 million increase to its share buyback program to its new level of $1 billion.

Another favor Altria does for shareholders is to hold a very clear and honest dividend policy. Altria pledges to return 80% of its yearly adjusted earnings per share to investors via the dividend. And, thanks to its stable business model and reliable forecasts, investors have a pretty good idea of what to expect.

Bottom line: Altria is the best tobacco company
Reynolds American and Lorillard are highly profitable businesses that produce solid cash flows, and pay compelling dividends. They aren't bad businesses by any means; at the same time, both Reynolds American and Lorillard have red flags that investors should keep in mind. They are both reliant on menthol cigarettes, which face an alarming level of regulatory scrutiny. Should the FDA decide to go after menthol, it will mean dark days for Reynolds American and Lorillard.

Meanwhile, Altria pays a higher dividend than its two closest peers and does not rely on menthol cigarettes. Once you factor in its brand power, Altria is the clear leader among tobacco stocks.

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