Marlboro owner Altria Group Inc. MO seems to be steadily progressing on its growth trajectory despite market volatility and ongoing headwinds in the tobacco sector. The company has seen its stock price surge of almost 10% in the past twelve months and has a long term earnings growth rate of 7.38%. The stock has a high dividend yield of 3.9% and a low beta score of 0.48.
The Fire Behind the Smoke of Altria
After posting negative surprises for the last two quarters in 2015, Altria made a strong start to 2016 recording both higher earnings and sales driven by strong pricing power and better-than-expected volume growth in first-half 2016. The company even raised its full year 2016 outlook based on robust first-half 2016 results.
Supported by a lower excise tax, the company witnessed a year-over-year increase in gross profit and operating income during the period. The company has an average positive surprise of 1.09% for the last four trailing quarters.
The core tobacco segments yielded decent results with Marlboro achieving its targeted market share in the first half. Brands like Copenhagen and Skoal also gained share during the period.
Further Altria puts a lot of focus on developing and tapping the growing market of low-risk, smokeless tobacco products like e-cigarettes. Its MarkTen e-cigarette brand has gained popularity after its launch in Aug 2013.
The tobacco maker expects an earnings growth of 7.5–9.5% from the adjusted diluted earnings per share of $2.80 posted in 2015. Its objective is to achieve adjusted earnings of 7% to 9% in the long term. Analysts expect earnings for 2016 and 2017 to grow 8.9% and 8.8% year over year respectively.
Altria also regularly rewards its shareholders with dividends and has recently hiked its quarterly dividend by 8%. The company has a target of maximizing its shareholders return and achieving an 80% dividend payout ratio with its cash.
Altria is facing declining volumes for last several quarters largely due to general shift of consumption away from tobacco products. Widespread anti-tobacco campaigns are mainly responsible for this shift of preference.
Governments around the world are imposing restrictions on tobacco companies which, in turn, are lowering cigarette consumption. The U.S. Food and Drug Administration (FDA) has made it mandatory for tobacco companies to use precautionary labels on cigarette packets to dissuade customers from smoking.
In May 2016, the FDA expanded its restrictions to e-cigarettes alongside traditional tobacco products. The FDA had announced that tobacco makers must seek marketing authorization for any tobacco product introduced after Feb 15, 2007. The law was extended to include e-cigarettes, pipe tobacco, cigars and hookahs, also.
Stocks to Consider
Altria currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks within the broader consumer staples industry include Sanderson Farms Inc. SAFM, Omega Protein Corp. OME and Tyson Foods Inc. TSN. All the three companies currently sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
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