Over the long run, tobacco stalwart Altria Group (NYSE:MO) has been one of the most consistent performers in the stock market, producing double-digit annual percentage gains for decades. Yet even though the stock current rests at its highest levels since its most recent spinoff six years ago, Altria Group has some investors concerned about trends in the cigarette industry and the company's ability to squeeze more profit from consumers if sales volumes continue to decline.
Nevertheless, there are several reasons Altria has more room to run higher. Let's look at three key considerations that could send Altria shares higher in the near term.
1. If interest rates remain low, investors will want Altria's dividend yield even more.
Altria's dividends have been a huge attraction to investors throughout its history, with the company's cash flow providing reliable payouts to shareholders. Moreover, given the long-held worries that investors have had about business risks like potentially massive lawsuit liability in the 1990s and early 2000s and the more recent threat of heightened regulation, investors in Altria have tended to discount the stock, boosting its dividend yield to levels that only a few of its peers can attain. Even though today's 4.7% yield is a far cry from the 7% to 8% yields that investors enjoyed more than a decade ago, Altria still ranks among the top dividend payers in the S&P 500.
Economic forecasters have predicted that interest rates should rise soon, and some Altria shareholders have feared rising rates would reduce the desirability of the tobacco giant's stock. Yet those forecasts have thus far turned out to be wrong, and a growing number of bond market analysts believe that even once the Federal Reserve starts boosting short-term rates, the impact on the broader bond market will probably be less extreme than once feared. If that turns out to be the case, then one of the biggest perceived threats to Altria will disappear, and that could keep sending share prices higher.
2. The Reynolds-Lorillard merger might not be as big a threat to Altria as some think.
The announcement a few months ago that Reynolds American (NYSE:RAI) and Lorillard (UNKNOWN:LO.DL) would merge sent shockwaves through the tobacco industry, with the combination of the second- and third-largest tobacco companies in the U.S. suddenly creating a viable threat to Altria's long dominance of the industry. For Reynolds, acquiring the key Lorillard brand Newport adds to its existing lineup of well-known products, such as Camel, and other potential gains from operational synergies should put Reynolds in a stronger position to compete against Altria.
Yet even if the merger goes through, Altria will still be in a strong position. Its Marlboro brand still has market share of more than 40%, and no brand the post-merger Reynolds will own should come close to challenging Marlboro. When you add in Altria's other cigarettes, its market share climbs above 50%. Moreover, with former subsidiary Philip Morris International (NYSE:PM) helping to spread Marlboro's brand awareness across the globe, Altria benefits from the global reputation its key cigarette line has.
In addition, as proposed, the Lorillard-Reynolds merger won't take full advantage of the potential competitive threat to Altria. In particular, selling off Lorillard's blu eCigs business will be a blow to Reynolds, whose Vuse electronic-cigarette brand doesn't have quite as much momentum. What could have been a huge threat to Altria's MarkTen brand will be a much more even fight even if the merger goes through, and that's good news for Altria shareholders seeking growth from the e-cigarette niche.
3. Altria's stake in SABMiller provides much-needed diversification.
Many people don't realize that Altria isn't just a tobacco company. It also has a 27% stake in beer company SABMiller, which produces well-known beer brands Miller and Foster's as well as having a joint venture with Molson Coors to attack the U.S. market more aggressively.
Over the years, SABMiller has substantially enhanced Altria's bottom line. In 2013, Altria reported nearly $1 billion in earnings from its equity investment in SABMiller, and the general trend for SABMiller's contribution to Altria income has pointed upward for years.
Altria also earns some profit from its wholly owned Ste. Michelle Wine Estates division, which makes brands including Columbia Crest and Chateau Ste. Michelle. But SABMiller is a much larger component of Altria's overall profitability, and hanging onto its exposure to the beer and wine segment give Altria a possible growth strategy even if tobacco keeps declining.
Altria has already benefited greatly from these factors, and so some might still argue they're already reflected in the stock's price. Nevertheless, as events develop, these three things could contribute further to Altria's performance in the future.
Dan Caplinger has no position in any stocks mentioned. 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.