The United States' most dominant cigarette company reported second-quarter results earlier this week that did little to ease investors' worries amid increasing legislation and anti-smoking campaigns.
Altria was able to reaffirm its full-year forecast of $2.01-$2.07 in adjusted earnings, but it cautioned that high unemployment rates and a weak economic environment are likely to affect consumer cigarette-buying habits.
The potentially damaging impact that new warning labels will have on U.S. cigarette manufacturers has investors worried, too. Based on an FDA ruling, Altria, along with U.S. rivals Lorillard
Growth in the company's alternative to traditional tobacco products, smokeless tobacco, slowed to a crawl in the second quarter, with sales up only 4%. Altria still commands the lion's share of the U.S. smokeless-tobacco business, but the door is being left open for Reynolds American to close the gap. Smokeless tobacco makes up just a fraction of these tobacco giants' current revenue streams, but it could be the difference between bridging the gap if anti-smoking regulations continue to be adopted or falling by the wayside.
Even Altria's ability to pass along price increases to consumers can't be seen as a complete victory. It's clear that consumers are hooked enough on Altria's products to pay a premium price, but Altria's seasonally adjusted cigarette volume fell by 4.5%, worse than its previous guidance. The drop is predominantly due to the existence of cheaper alternatives in the form of Pall Mall from Reynolds American and Maverick from Lorillard. The company also sees shipping volume falling even further in the second half of 2011.
Make no mistake: Altria is a portfolio staple among dividend-seeking investors. It's very hard to argue against a company that, as fellow Fool Morgan Housel pointed out just last week, has returned a jaw-dropping 278,000% since the late 1960s if you had held your position and reinvested the dividends. And Fool Matt Koppenheffer has a more upbeat take on the company's future. Altria's current yield is near the top of its sector at 5.6%, but it has its own set of worries -- namely, that it bears a significantly higher debt load than many of its peers and boasts a payout ratio of 76%, which could curb near-term dividend growth.
But yesterday's quarterly report only convinced me further that Altria's business model is broken. Even at 12 times forward earnings, the company isn't priced attractively enough in my opinion to attract long-term investors, considering the legal ramifications, anti-smoking campaigns, and intense competition surrounding this company. This company's best days may be behind it.
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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong The Motley Fool owns shares of Altria and Philip Morris International. Motley Fool newsletter services have recommended buying shares of Philip Morris International and writing puts in Lorillard. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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 that's never the butt of any jokes.