Why Altria Group Smoked 28% Higher in 2013

Tobacco giant Altria Group (NYSE: MO  ) had a solid year in 2013, with gains of about 28% roughly matching the returns of the broader market. Yet even though shareholders have to be pleased with the company's outperformance compared to its former international unit, Philip Morris International (NYSE: PM  ) , competition domestically has heated up considerably over the past year. In particular, Lorillard (NYSE: LO  ) has given its shareholders better returns and, more importantly, it has taken the leadership role in the e-cigarette market, forcing Altria and rival Reynolds American (NYSE: RAI  ) to play catch-up. Let's take a closer look at what happened with Altria Group this year and whether its stock will rise in 2014.

Source: Dennis Skley, Flickr.

What moved Altria Group stock this year?
Altria and its tobacco peers have faced the specter of regulatory challenges for decades, and 2013 gave Altria, Lorillard, and Reynolds American more of the same. In April, President Barack Obama proposed a budget that included a near-doubling in the federal tax on cigarette sales, adding $0.94 per pack to an already extensive array of taxes at the federal, state, and local levels in many jurisdictions. In light of an advertising campaign  last year from the Centers for Disease Control and Prevention and the widespread banning of smoking in many public areas of cities as large as New York, Altria and its industry rivals continue to face pressure.

One area that Altria hasn't had to worry nearly as much about as Lorillard and Reynolds American is the debate over menthol. The FDA had a public comment period during the second half of the year that ended late last month, and now investors are anxiously awaiting the FDA rules following a report that was highly negative about menthol products. Altria only gets about 20% of its total sales from menthol versions of its Marlboro cigarettes, less than Reynolds American's 30% menthol sales and far below the 90% of Lorillard's overall revenue that comes from menthol.

Moreover, Altria has provided the consistent dividend growth that investors have come to expect. A 9% boost this year improved on its growth rate from previous years, and Altria carries an impressive 5% yield in addition to having dedicated additional cash to stock buybacks.

MO Total Return Price Chart

Altria Total Return Price data by YCharts.

Despite Altria's leadership role in the industry, it proved to be slow out of the gate in identifying the profit potential from the latest trend toward electronic cigarettes. Lorillard took the point in promoting e-cigarettes last year with its acquisition of blu eCigs for $135 million, capturing more than 40% market share in the rapidly growing niche. Altria said at midyear that it would follow with its launch of MarkTen e-cigarettes in August, and with cross-promotional activities with Philip Morris, Altria hopes to extend its marketing of the products worldwide.

But one thing that many investors don't know about Altria is that it owns about 27% of brewing giant SABMiller, the company behind the popular Miller beer brand. The interest helps give Altria greater diversification away from tobacco than Lorillard, Reynolds American, or Philip Morris International. Moreover, with SABMiller producing consistent profits, Altria's stake could become even more important to its overall results in the future, especially if tobacco sales continue to slide.

Stats on Altria Group

Revenue, Past 12 Months

$17.72 billion

1-Year Revenue Growth

1.9%

Net Income, Past 12 Months

$5.15 billion

1-Year Net Income Growth

32%

Source: S&P Capital IQ.

What's next for Altria Group?
Clearly, the biggest question for Altria going forward is where it will face its next regulatory threat. Electronic cigarettes have already drawn attention from regulators, and with attempts to create new products having largely been thwarted thus far, Altria could struggle to find new growth avenues as traditional cigarette sales remain under downward pressure.

Nevertheless, Altria's dominant market share gives it pricing power and competitive advantages over Lorillard and Reynolds American that aren't likely to go anywhere in the near future. Growth might not be as strong as investors would like, but absent an unlikely complete ban on tobacco, Altria's prospects in 2014 still look bright.

Stay smart about your stocks
Altria proves one simple fact: Dividend stocks can make you rich. Over the long term, the compounding effect of Altria's quarterly payouts, as well as their growth, have added up to huge returns. With this in mind, our analysts sat down to identify the absolute best of the best when it comes to rock-solid dividend stocks, drawing up a list in this free report of nine that fit the bill. To discover the identities of these companies before the rest of the market catches on, you can download this valuable free report by simply clicking here now.

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


Read/Post Comments (3) | Recommend This Article (2)

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 December 28, 2013, at 1:27 PM, mansourg54 wrote:

    The proposed $0.94per pack tax hike is the starting amount for negotiations, if this topic ever comes up for debate. the final amount will be much smaller.Hiking taxes on tobacco to fund other programs means the government wants smokers to pay for these programs, which does not make sense and will face stiff resistance. What analysts, who follow Altria, forget is that MO keeps changing its product mix in order to increase profit and shareholder value. MO will stay in tobacco as long as it has a monopoly through its Marlboro and tobacco business stays very profitable

  • Report this Comment On December 29, 2013, at 9:11 PM, waltertschwe wrote:

    I'm sure I'll smoke Altria and 90% of the money managers on wall street in 2014.

    http://therandomfunds.com/

  • Report this Comment On December 29, 2013, at 9:12 PM, waltertschwe wrote:

    I'm pretty sure my funds will smoke Altria and most money managers in 2014.

    therandomfunds.com

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