Smokin' Stock: Altria Group

Smoking is a noxious habit but that doesn't mean investors should turn up their noses at Altria Group (MO). The leading U.S. tobacco maker is gaining market share, its stock looks cheap and -- perhaps best of all -- the dividend is both rich and reliable.True, in the long run any product that kills its consumers is probably a bad bet. Happily for Altria, if not for the rest of us, a study by the Centers for Disease Control showed that adult smoking actually rose in 2008. And although state budget woes make tobacco a likely target of further excise tax increases, states also slashed funding to reduce tobacco use among their residences by 15% in the past year, according S&P analyst Esther Kwon, who rates Altria's shares a strong buy.

"We see 2009 cigarette industry unit volumes down at a high-single-digit rate on 2009's significant cigarette federal excise tax hike, but a moderation to a mid-single-digit rate in 2010," wrote Kwon in a report to clients. "We still like tobacco fundamentals and find Altria shares attractive."

Meanwhile, the company already claims more than 50% of the U.S. tobacco market and continues to nibble away at the competition, thanks in no small part to Marlboro being the most popular brand of smokes in the U.S. (Altria's nearest competitor, Reynolds American (RAI), has about 30% of the tobacco market.)

But it's the opportunity for price appreciation and dividend income that really makes shares compelling. Altria's stock goes for just 11 times forward earnings. That represents about a 40% discount to the S&P 500 ($INX) and more than a 15% discount to its own five-year average, according to Thomson Reuters. (Shares are deeply discounted on a trailing earnings basis, too.) Return on equity stands at 80%, suggesting Altria is an inexpensive, high-quality stock.

Then there's the price-earnings-to-growth (PEG) ratio, which measures how fast a stock is rising relative to its growth prospects. By that yardstick Altria's stock offers discounts of 30% to the broader market and 15% to its own five-year average. (That's none too shabby considering that Altria has outperformed the S&P 500 by 10 percentage points over the last 52 weeks.)

Finally, there's that rich and reliable dividend. With the exceptions of 2007 and 2008 when the company spun off Kraft (KFT) and then Philip Morris International (PM) to shareholders, Altria has paid out a steadily rising cash dividend every year since 1970. The current yield comes to a whopping 6.9%, while the five-year average stands at 15.6%, according to Morningstar.

Analysts average price target stands at $22.05. Throw in that generous dividend yield and you get an expected return of nearly 17% in the next 12 months or so.
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