5.9% Dividend Yield Makes Altria Attractive, Despite Risks

Source from:  City BIZ Lish 08/24/2011

Company Overview: Altria Group , Inc. (MO) engages in the manufacture and sale of cigarettes, smokeless products, and wine in the United States and internationally. It offers cigarettes under the Marlboro, Virginia Slims, Parliament, Benson & Hedges, Basic, and L&M brands; smokeless tobacco products under the Copenhagen, Skoal, Red Seal, Husky brands, and Marlboro snus brands; and machine-made large cigars and pipe tobacco. The company also produces and sells blended table wines under the Chateau Ste. Michelle and Columbia Crest names; and distributes Antinori and Villa Maria Estate wines and Champagne Nicolas Feuillatte in the United States. In addition, it maintains a portfolio of leveraged and direct finance leases in rail and surface transport, aircraft, electric power, real estate, and manufacturing. The company sells its tobacco products to wholesalers, including distributors; large retail organizations, such as chain stores; and the armed services. Altria Group, Inc. markets its wine products to restaurants, wholesale clubs, supermarkets, wine shops, and mass merchandisers. The company was founded in 1919 and is headquartered in Richmond, Virginia. Dividend Adjusted Return: Over the past 10 years, the company has delivered a 15.9% annualized return to its shareholders (click to enlarge images):

Financial Performance: Altria has had stable revenue and EBITDA growth throughout the recession and the company has incredible EBITDA margins (40%). In addition, MO has maintained a very conservative leverage profile and a healthy payout ratio.

Historical Valuation: MO is currently trading around 8.8x EBITDA, which is slightly higher than its historical 10-year average of 7.4x. We believe the current premium is justified given the current dividend yield of 5.9%.

Peer Comparison: MO is currently trading inline with its tobacco industry peers. However, the company has an above average dividend yield.

Potential Risk Factors: ·Margin pressure from increased competitive spending within the US cigarette industry following the $0.62/pack federal excise tax increase. ·State excise tax increases in light of a weakening economic environment and growing state budget pressures. ·Potential impact of FDA regulation of tobacco. ·The adverse impact of indoor smoking bans. ·Any large-scale unforeseen adverse tobacco litigation development. ·Despite the potential risk factors above, we believe that MO's risk/reward profile is very attractive given its 5.9% dividend yield. Enditem