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Instant Analysis: Altria Group Inc. Cuts Jobs As Shipments Decline

By Leo Sun – Feb 2, 2016 at 12:00PM

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Why is the tobacco giant cutting nearly 500 jobs?

Tobacco giant Altria (MO 0.98%) recently announced that it would lay off 490 people, or 5% of its workforce, to cut annual costs by $300 million. Altria made that announcement after its fourth-quarter earnings missed analyst estimates on both the top and bottom lines.

During the quarter, revenue rose 2.6% annually to $4.73 billion but narrowly missed estimates by $10 million. Cigarette volume fell 2.6% to 30.51 million sticks, but its domestic market share rose from 50.9% a year earlier to 51.4%. Net earnings grew just 0.9% to $1.25 billion, or $0.67 per share, which missed expectations by a penny.

Why is Altria cutting jobs?
Altria has two main strategies for offsetting declines in cigarette shipments. The first is to raise prices. This strategy might seem risky, but cigarettes in the U.S. still cost much less than in other markets with comparable smoking rates, like the U.K. or Australia.

The second strategy is to cut jobs. Back in 2010, Altria had 10,000 employees. After this new round of job cuts, that number will drop to just over 8,500. This strategy, which doesn't bode well for Altria's long-term employees, protects its bottom-line growth and its ability to raise its dividend annually. Stock buybacks, which reduce the number of outstanding shares, also help keep its earnings growth on track. That's why Altria's annual revenue only rose 0.7% between fiscal 2010 and 2014, but its earnings per share rose 36.9%.

Is Philip Morris International a better bet?
For now, Altria remains a stable consumer staples play that is shielded from currency fluctuations and bolstered by low gas prices. Looking ahead, it's likely the company will keep raising prices, cutting jobs, and buying back stock to inflate its earnings.

However, investors looking for bigger, more sustainable gains might want to check out Altria's overseas counterpart Philip Morris International (PM 0.08%) instead. PMI has been crushed over the past year by currency impacts, but its underlying growth remains much stronger than Altria's. In the third quarter, PMI's revenues rose 5.9% on a constant currency basis. If the dollar weakens, PMI's growth might become more sustainable than Altria's anemic gains.

Leo Sun owns shares of Philip Morris International. The Motley Fool has no position in any of the stocks mentioned. 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.

Stocks Mentioned

Altria Group Stock Quote
Altria Group
$46.83 (0.98%) $0.46
Philip Morris International Stock Quote
Philip Morris International
$101.96 (0.08%) $0.08

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