Despite uncertainties, Altria rated favorably

Taking Stock

Your Money

December 05, 2004|By ANDREW LECKEY

Stock of Altria Group Inc. looks attractive to me. What is the company's outlook?

- S.T., via the Internet

The giant tobacco and food company formerly known as Philip Morris plans to split into two or three separate companies once there is an easing of tobacco litigation.

This would result in an independent Kraft Foods Inc., Philip Morris USA and Philip Morris International, all of which management currently considers to be undervalued. Dividing tobacco interests would protect its international business from U.S. litigation.

The company owns 85 percent of Kraft, maker of Oreo cookies and Oscar Mayer lunch meats, which some analysts value at $45 billion. Kraft struggled this year because of higher commodity costs and low-carbohydrate diets. Separately, Wm. Wrigley Jr. Co. recently paid $1.5 billion to buy Kraft's LifeSavers and Altoids businesses.

Speculation is that a split-up of Altria into three parts could occur from late this year to 2006 or 2007, because of uncertainty over the course of tobacco litigation. However, the industry seems buoyed by President Bush's victory because it makes an increase in regulatory action unlikely.

Not that there's a clear road ahead.

The company faces a U.S. Justice Department racketeering lawsuit against the tobacco industry seeking $280 billion in damages; a suit in Illinois in which it is accused of minimizing the risks of Marlboro Light cigarettes versus regular Marlboros; and a class-action appeal in which the state of Florida seeks to recover the cost of treating sick smokers.

Shares of Altria are up 5 percent this year, after last year's 43 percent gain.

Third-quarter profits rose 6 percent thanks to a lower tax rate and greater income from its stake in brewing giant SABMiller PLC. It also strengthened its U.S. tobacco market share last quarter by 1.1 share points to 49.9 percent, helped by a sales increase by Marlboro.

Altria is expected to sell its $6 billion, 36 percent stake in SABMiller, but cannot do so before the end of June 2005.

Despite the uncertainties, Altria shares receive a "buy" consensus rating from Wall Street analysts who track them, according to the Boston-based First Call research firm. That consists of three "strong buys," four "buys" and six "holds."

Earnings are expected to increase 2 percent this year, versus 4 percent projected for the tobacco industry. Next year's expected 9 percent gain is the same as that of its peers. The anticipated five-year annualized increase of 9 percent is the same as the industry-wide projection.

I'm considering adding to my position in Janus Core Equity. What's your opinion of this fund?

- R.D., via the Internet

To attract the broadest possible group of investors, this core holding invests mostly in large companies and has no strong bias toward growth or value.

It looks for long-term strength, either from strong cash flow, sustainable earnings growth or improving returns on capital.

The $611 million Janus Core Equity Fund is up 14 percent over the past 12 months and has a three-year annualized return of 4 percent. Both results rank in the top one-fourth of all large-growth and value funds.

Karen Reidy, in her fifth year as portfolio manager, has exhibited an ability to balance between keeping valuations in check and seeking upside potential. The fund is choppy at times, as in 2003 when Reidy was skeptical about the economic recovery early in the year. A positive is that the Janus fund family keeps expanding its research analyst staff.

"Investors have gotten a taste of Reidy's abilities to sense when the market is in trouble and to cut back on her picks that aren't working," said Dan McNeela, analyst with Morningstar Inc. in Chicago. "You should have a long-term outlook with this fund, but it has wide appeal to anyone who wants U.S. stocks."

Financial services and industrial materials each constitute about 20 percent of the fund's assets. Other significant groups include consumer services and hardware. Top holdings include Roche Holding, Marriott International, General Electric, J.P. Morgan Chase, Tyco International, Freddie Mac, Motorola, ExxonMobil, Best Buy and Canadian National Railway.

In regard to the mutual fund scandal, Janus settled with regulators last April to resolve allegations that it allowed 12 clients market-timing privileges in a number of funds. As a result, it paid $226 million in restitution, penalties and fee reductions.

Janus Core Equity is a "no-load" fund that requires a $2,500 minimum initial investment. Its annual expense ratio is 0.96 percent.

Every year we purchase U.S. Savings Bonds for the kids in our family. Which bonds are better to buy at this time - Series I bonds or Series EE bonds?

- M.V., via the Internet

The I bond is tied to the rate of inflation, while the EE bond is tied to the rate on five-year Treasury securities. You must decide which rate you think will increase the most.

Currently, the I bond rate is 0.42 percent higher than the EE bond yield. So for bonds purchased between Nov. 1, 2004, and April 30, 2005, the initial EE bond rate is 3.25 percent, while the rate for an I bond purchased during that period is 3.67 percent.

"The I bond would appear to be a much better investment right now," said Jack Quinn Sr., founder of SavingsBonds.com, an informational Web site in Spring Lake Heights, N.J. "However, if the Treasury rate goes up along with other interest rates as expected, the EE bond would make more sense."

Quinn's suggestion for a long-term investor would be the EE bond, even though its rate is currently less.

Andrew Leckey is a Tribune Media Services columnist. E-mail him at yourmoney@tribune.com.

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