Tobacco giant Altria (NYSE:MO) recently reported second quarter earnings that topped analyst estimates on both the top and bottom lines. Revenue rose 6.8% year-over-year to $4.88 billion, exceeding estimates by $130 million. Diluted earnings rose 15.6% to $0.74 per share, topping expectations by three cents.
Despite those robust results, the stock went nowhere after earnings. However, I still believe that Altria is a solid investment for four main reasons.
1. It's an all-American brand
Altria controls over 51% of the domestic cigarette market, and it's still growing. Its total market share rose half a percentage point during the first six months of 2015. Its flagship brand, Marlboro, accounts for 44% of all cigarette sales nationwide. Altria also controls 28% of the U.S. cigar market with brands like Black & Mild.
Since all of Altria's sales come from the U.S. market, its earnings aren't exposed to the currency headwinds that have hurt multinational companies. That pressure caused Altria's overseas counterpart, Philip Morris International (NYSE:PM), to report double-digit annual declines in revenue and operating income last quarter. Excluding currency impacts, both figures would have risen annually. Altria investors simply have to watch the U.S. market.
2. Rising shipments, rising prices
To offset declining smoking rates in the U.S., Altria often raises prices to preserve its top and bottom line growth. That was the case last year, when its adjusted cigarette shipments slipped 3% annually. Thanks to those price hikes, Altria's 2014 revenue improved 0.2% annually as net earnings rose 11.8%.
In the first half of 2015, Altria's adjusted cigarette shipments actually improved 0.5% year-over-year, thanks to retail share gains supported by low gas prices and a strong U.S. economy. As a result, Altria's revenue in the first half of 2015 rose 5.5% annually as net earnings climbed 1.2%. It also raised its full-year earnings guidance by a penny to a range between $2.76 and $2.81, representing 7.5% to 9.5% growth from 2014.
Altria's shipments might dip again in the future, but the company can keep raising prices to offset those declines. That's because cigarettes in the U.S. are still relatively cheap compared to the rest of the world. The average price of a pack of cigarettes across all 50 states (including excise taxes) is just $5.51. Meanwhile, smokers in Australia and the U.K. -- countries with similar rates of smoking -- willingly pay more than twice that amount due to higher excise taxes.
While consumers in different geographical markets may behave differently, cigarettes are a textbook example of a product with low price elasticity.
3. Growth beyond cigarettes
Altria knows that it can't keep hiking prices to offset shipment declines forever, so it's diversifying into other "smokeless" products. Revenue at that division, which mainly consists of its Copenhagen and Skoal brand snuff, rose 3.7% annually last quarter, and accounted for nearly 10% of Altria's top line. Altria controls over half of the U.S. snuff market.
Altria also sells wine through its Chateau Ste. Michelle, Columbia Crest, and 14 Hands Brands. Revenue at that unit rose 10.3% last quarter and accounted for 2.4% of the company's revenue. Altria also holds a major stake in brewery SABMiller, which contributed $225 million in earnings during its second quarter.
Lastly, Altria is steadily expanding its presence in the e-cigarette market with its MarkTen and Green Smoke brands. Altria doesn't report these revenues separately yet, but CEO Martin Barrington stated that early sales were "encouraging" during the second quarter conference call. Altria also expanded an e-cigarette collaboration with Philip Morris International to co-develop new products and pool together their research, development, and technological resources. If sales of e-cigs keep rising, both companies can further diversify their top lines further away from traditional cigarettes.
4. Big dividends
In the first half of 2015, Altria paid out $2 billion to its investors as dividends. Ever since Altria spun off PMI in 2008, both companies have raised their dividends on an annual basis.
Between 2010 and 2014, Altria raised its dividend an average of 8.9% per year, compared to PMI's average annual boost of 11.7%. Altria currently pays a forward annual dividend yield of 3.9%, compared to PMI's yield of 4.7%. While it might seem like PMI is a better income investment, its stock has only risen 4% over the past year, compared to Altria's 34% gain.
Do your homework
Despite those strengths, Altria isn't a perfect stock. The stock isn't particularly cheap at 21 times earnings, which merely matches the S&P 500's P/E ratio. Looking ahead, investors could also sell Altria on concerns about lower smoking rates, tighter regulations, and higher excise taxes. When interest rates rise, some investors might flee higher-yielding dividend stocks like Altria for the comparable safety of bonds. Therefore, investors should fully understand those risks before investing in this tobacco giant.
Leo Sun 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.