Altria Group (MO)

As of February 2011, Altria's stock is yielding 6.4%. This represents 114% of TTM free cash flow. In addition, Altria currently only has $2.3 billion in cash to offset $12.2 billion in relatively high-yielding debt.

Interest coverage now is reasonable at 6 times EBITDA, but not extraordinary. For now, since no debt is due in the next 12 months, the company is safe, but once the company must repay debt it will lose in free cash flow.

The regulatory environment for cigarettes has become extremely adverse to the tobacco industry. In November 2010, the FDA announced that all cigarette packages in the US must contain graphic images in the warning labels that depict corpses and diseased lungs. The agency aims to reduce the US smoking rate to 12% over a decade from 21% in 2010.

Beginning October 22, 2012, all cigarette packages must contain such graphic labels.

Currently, Canada, the UK, and Brazil are among the 38 countries in the world that require graphic cigarette warnings. As a result of the labels, one in five Canadian smokers reduced his smoking intake according to one study of over 600 people.

This regulation will have a small effect on the market of loyal smokers but will slow down the adoption of smoking in non-smokers, according to one analyst.

Altria actually supported the measure, breaking ranks with its industry peers, as a way to standardize manufacturing standards and spur development of alternative tobacco products.

Continued risk of litigation, which could destabilize the tobacco industry. Though the legal environment has improved recently, the possibility of lawsuits against tobacco companies remains. In Florida, 8000 individual cases are pending against Altria for smoke-related deaths and damages. On February 18, 2009, a jury ruled that Altria must pay $8 million for the death of Stuart Hess, the first of these cases. If the verdict is upheld, the cumulative damages Altria may have to pay will be extraordinary.

Rising excise taxes will reduce profits as governments continue to use taxation to reduce public smoking and as a source of revenue. The federal excise tax will rise from 39 cents a pack to almost $1.01 on April 1, 2009.

Declining cigarette consumption due to decreasing social acceptability of smoking and increased awareness of risks involved.