As a value investor who particularly favors dividend-paying stocks, it'd seem natural for me to invest in Altria
Altria released its fourth-quarter and fiscal 2005 earnings report Tuesday morning. Despite shrinking volume of cigarette sales in the U.S., Altria is still financially healthy -- no pun intended. The company generates plenty of free cash flow, though it's not growing that free cash flow very quickly. For the year, Altria grew diluted earnings per share from continuing operations by 11.6%, on sales gains of 9.2%. However, those revenue gains include foreign currency benefits, non-organic growth from acquisitions, and an extra week of shipping at majority-owned Kraft Foods
Domestically, the company's tobacco business volume was down 0.8% for the year, but the company estimates that it was comparatively flat with last year (adjusting for fewer shipping days and less promotional shipping). In addition, the company estimates that its brands now control a record 50% of the domestic market, and its Marlboro brand alone controls 40%. On a purely anecdotal note, I find it interesting that volumes are basically flat when the number of smokers has generally decreased. Either the remaining smoekrs are smoking more, or the total number of smokers isn't decreasing that quickly.
On the international front, the company's growth is far more impressive, though it depends on which corner of the globe you peer into. On the whole, the volume of cigarette- and tobacco-related products increased 1.2% excluding acquisitions, and 6.1% with acquisitions. Due to a mix of one-time benefits, price increases, acquisitions, and currency gains, income from operating companies was up 19.2%
However, there are pockets where things are not going well. The two largest trouble spots are Spain, where increasing sales of deep-discount products are cutting into the company's cigarette sales, and Germany, where customers prefer to purchase tobacco portions and roll their own cigarettes. Interestingly, the German government has historically taxed tobacco portions at a far lower rate than cigarettes, which creates a cost advantage at the consumer level. Fortunately for Altria, that will change this coming April, when taxes will be equalized. This is important; while launching its own tobacco portions products has helped Altria, its sales of cigarettes in Germany have fallen by double-digit percentages each of the last two years.
Few large and established companies can grow at a mid-single digit rate and still yield more than 4%. Occasionally, large banks such as Wachovia
The company's slow growth in free cash flow over the last few years leads me to believe that future earnings and free cash flow growth won't be too brisk. In addition, next year's earnings are expected to fall slightly because of taxes, currency effects, sales declines in Spain, and Kraft's restructuring. If the one-time Kraft restructuring charge is backed out, there would be a slight improvement over this year's results -- but not a large-enough gain to get excited about, given the current share price. Right now, I plan to sit on the sidelines a bit longer.
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