Why Altria Group Smoked 28% Higher in 2013

Tobacco giant Altria Group (MO -0.37%) 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 (PM -1.11%), competition domestically has heated up considerably over the past year. In particular, Lorillard (LO.DL) 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 (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.

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

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.

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