Altria Group (MO)

Why is the cigarette business so good? Altria's cost to produce 1000 cigarettes is $16.40. Talk about profit margin! This is 16% to 21% lower than the competition. As a tobacco company, Altria is somewhat shielded from poor economic conditions. Smokers will still smoke, regardless of the current interest rate.

Altria owns Phillip Morris USA, Phillip Morris Capital Corporation, John Middleton, Ste. Michelle Wine Estates, U.S Smokeless Tobacco Company, and has a 28.5% stake in SABMiller (manufactures beer). As a tobacco company, Altria is somewhat shielded from poor economic conditions. Smokers will still smoke, people will still drink, regardless of the current interest rate.

Altria Group (MO) reaffirmed its 2008 guidance for adjusted diluted earnings per share from continuing operations in the range of $1.63 to $1.67. This represents a growth rate of approximately 9% to 11% from an adjusted base of $1.50 per share in 2007. "This full-year earnings per share forecast reflects expected stronger earnings per share growth in the second half of this year when compared to the first half," said CEO Micheal Szymanczyk.

“Altria and its operating companies have dedicated employees, strong brands, remarkable cash flows, disciplined financial management, and an increasingly diverse tobacco product portfolio,” Mr. Szymanczyk continued and then said, “I believe that these strengths should enable Altria to deliver consistent annual total shareholder return in excess of 12%.”

Altria Group, Inc. (MO) on Thursday 28th Aug, announced that its Board of Directors voted to increase the company's regular quarterly dividend. The new quarterly dividend of $0.32 per common share is up 10.3% from the previous rate of $0.29 per common share, and represents an annualized rate of $1.28 per common share. The quarterly dividend is payable on October 10, 2008 to stockholders of record as of September 15, 2008. The ex-dividend date is September 11, 2008.

For those of you not very math proficient, that makes a $1.16 annual dividend for a nice very fat 5.25% yield. A 5% (and very safe and growing) yield and double digit earnings growth. Anything not to like? OK, sure tobacco kills but last I checked, Coca-Cola Company (KO) and Pepsico (PEP) were not "healthy for you" and folks have no qualms about investing with them.

At the current $20.90 a share price, that equates to a 6.1% dividend yield....

• See also Altria's Resilence and 7.5% Yield

Altria Group Inc.’s (MO) purchase of UST Inc. (UST), the largest smokeless-tobacco maker, could spark a wave of consolidation in the domestic tobacco industry.

Altria is the owner of Phillip Morris USA, maker of Marlboro cigarettes. It offered $69.50 per share in cash for UST, the maker of Skoal and Copenhagen brand snuff. Altria will also assume $1.3 billion in debt, bringing the total value of the deal to approximately $11.7 billion.

“The combination of Altria and UST creates the premier tobacco company in the United States with leading brands in cigarettes, smokeless tobacco and machine-made large cigars,” Michael E. Szymanczyk, Altria’s chairman and chief executive, said yesterday (Monday) in a statement.

It’s a smart move for Altria, which has had little success with its own Marlboro-branded smokeless tobacco products. Smokeless tobacco accounts for $3.7 billion in sales annually. It is the fastest growing segment of the tobacco industry.

UST manufactures the two most popular brands of smokeless tobacco for adult users. According to data from the U.S. Center for Disease Control, Skoal has a 28% market share and Copenhagen has a 22% share. Together, they make up half of the U.S. market.

Dividend paying stocks seem to perform well over the long term. Let's take a look at Altria Group (MO) as an example. In his book The Future for Investors, Jeremy Siegel conducts a study on the performance of all of the stocks that originally comprised the S&P 500 when it was created in 1957. Looking at all of the stocks that were part of the original S&P 500 and still existed as of 2003, Dr. Siegel made an interesting discovery. Dr. Siegel states, "From 1897 through 2003, 97 percent of the total after-inflation accumulation from stocks comes from reinvesting dividends. Only 3 percent comes from capital gains."

He also discovered that the best performing stock during those 46 years was MO. According to Dr. Siegel, if you had invested $1,000 in MO in 1957 and reinvested the dividends in more MO stock over the years, you would have had $4,626,402 by 2003. That is an incredible 19.75 percent annualized return. To put this in perspective, the S&P 500 only delivered a 10.85 percent annualized return during that same period—which means a $1,000 investment in the S&P 500 in 1957 would have only turned into $124,486 by 2003.

Thanks to the magic of compounding, you would have made $4,501,916 more investing in MO than you would have investing in the S&P 500 ($4,626,402 - $124,486 = $4,501,916).

Currently, MO has a dividend yield of 7.9 percent. If you are looking to buy a stock and hold it for a while, MO is a great candidate.

Could MO continue to decline in value? Sure. All stocks are at risk of declining in value. If it does though, it will be easier to reinvest your dividends and buy even more shares of MO. Plus, when the market eventually turns back around and starts moving higher, MO is likely to move up right along with it.

Altria's Marlboro is the most popular cigarette brand in the world, selling more than the next seven leading international cigarette brands combined. Not only that, it's one of the most popular brands period, up there with the likes of Coca-Cola and other iconic brands. As long as Marlboro's around, Altria will stay at the top of the tobacco market.

With strict government regulation on marketing in the tobacco industry, Altria's market share can't come under attack from normal advertising. As a result, Altria doesn't have to spend exorbitant amounts of money maintaining its market share through advertising. Altria's Marlboro is the most popular cigarette brand in the world, selling more than the next seven leading international cigarette brands combined.

An improved litigation environment should make Altria's U.S. litigation expenses more stable and easily predictable.