How Altria Plans to Keep Delivering Returns

Despite the decline of smoking, Altria can keep generating growth with price increases and a focus on other brands.

Apr 17, 2014 at 10:00AM

In the world of tobacco stocks, many investors are concerned that the decline in smoking will result in a similar decrease in profits. Indeed, members of big tobacco such as Altria Group (NYSE:MO) and Lorillard (NYSE:LO) continue to grapple with a smaller pool of customers every year. The public's increasing distaste for smoking is sure to result in future drops in smokers as well going forward. This seems to make for an uncertain future for tobacco companies, which likely has investors worried.

However, management teams across the industry don't seem at all worried when they present their results. When it comes to Altria, the maker of Marlboro, management has a strong sense of confidence that they can keep delivering the kinds of returns that made the past century so profitable for investors.


Price increases offset volume declines
Altria's plan to keep revenue and earnings per share going in the right direction is fairly straightforward: Keep expenses down and prices going up. Remember that tobacco companies are essentially banned from advertising. And, due to the low manufacturing costs inherent in the production of cigarettes, it's fairly easy for Altria to keep a lid on expenses.

On the revenue side, the company fully acknowledged the decline in smokers when it presented at the Consumer Analyst Group of New York conference earlier this year. Despite a steady 3%-4% annual decline in the number of smokers for several years now, Altria still produced nearly 8% earnings growth compounded annually from 2007-2013.

Price increases are a major reason for its solid profit growth during that time. And, volumes are still growing for cigars and smokeless products, two markets in which Altria holds a leadership position.

It doesn't seem that Altria is overly concerned with the risk of increasing litigation, either. That stands to reason, since states and municipalities desperately depend on the excise taxes generated by sales of cigarettes and other tobacco products.

New product categories ignite growth possibilities
The issue getting the most attention right now for tobacco companies is electronic cigarettes. Growth in that category has been astounding as consumers flock to e-cigs as a safer and more fashionable alternative to traditional cigarettes. Big tobacco companies have made some high-profile acquisitions in the e-cigarette space to try and capture some of that growth.

Lorillard is hoping its aggressive expansion into this market will help mitigate some of the overarching uncertainty regarding its flagship Newport brand of menthol cigarettes. For example, last year Lorillard purchased SKYCIG, a U.K.-based manufacturer of electronic cigarettes, to boost its international standing in the category. This was meant to complement its existing considerable U.S. presence in the category. Lorillard is already the industry leader in e-cigarettes domestically. Its blu e-Cigs brand commands 48% market share.

Altria soon followed suit with its own electronic-cigarette expansion. The company recently rolled out its MarkTen brand nationally after strong test results in two states. And, a few months ago Altria bought the e-vapor business from Green Smoke for $110 million.

The growth potential of the electronic-cigarette industry as well as Altria's flagship Marlboro and other brands gave management confidence to reiterate its 2014 forecast of generating approximately 8% earnings growth. This would fall right in-line with the company's long-term target of 7%-9% earnings growth and allow Altria to continue increasing its dividend.

Altria has a very transparent dividend policy. The company pledges to distribute approximately 80% of its diluted earnings to investors via its dividend. Therefore, it's reasonable to forecast around 8% annual dividend growth over the long term, which is about what Altria has delivered over the past several years.

Let compounding interest work its magic
Altria isn't promising earth-shattering growth in the years ahead. After all, it operates in the tobacco industry, which inevitably has limited growth potential due to the decline in smoking. However, as long as Altria is able to pass along price increases at or above the rate of the smoking decline as well as realize growth from its other products, it should have no trouble passing along healthy dividend increases every year.

That's the formula that has made Altria such a fantastic stock to own. Its total return from 2008-2013 stands at 137%, well above the S&P 500 index's 44% return over the same period. Altria's high dividend yield, when combined with high single-digit dividend growth, is the magic formula that results in tremendous returns.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term just like Altria. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor’s portfolio. To see our free report on these stocks, just click here now.


Bob Ciura owns shares of Altria Group. The Motley Fool has no position in any of the stocks mentioned. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers