Altria rates `buy' thanks to dominant cigarette business

Taking Stock

Your Money

August 14, 2005|By ANDREW LECKEY

Q. Several mutual funds that I own hold shares of Altria Group Inc. Any guess as to what its future holds?

B.R., via the Internet

A. Here's why mutual funds own tobacco company shares despite health issues, related lawsuits and the gradual decline in the percentage of Americans who smoke:

Cigarettes are cheap to make, brand-loyal smokers accept price increases, and the firms generate tons of cash.

The stock of Altria (MO) is up 10 percent this year after gains of 18 percent last year and 43 percent in 2003. This cash-rich firm provides a 4.32 percent dividend yield for investors and actively repurchases its own shares.

Second-quarter profit of the maker of Marlboro and Parliament cigarettes rose 1.5 percent. Its Philip Morris subsidiary raised its market share to 50 percent from 49.8 percent, while international sales were up 5 percent.

The latest positive buzz about Altria stock, however, involves the prospects for the eventual breakup of the company. Steps to spin off Kraft Foods Inc. and, later, Philip Morris International could be accelerated if Altria scores victories in a tobacco industry federal racketeering case awaiting a ruling and in legal cases in Florida and Illinois.

That's no certainty, and court decisions remain the primary industry risk and cause of stock volatility. But confidence in the stock has risen since the rejection by a federal appeals court in February of a Justice Department claim for $280 billion in past profits from the tobacco industry. The Justice Department has asked the Supreme Court to overturn that ruling.

The analyst consensus recommendation on Altria shares is a "buy," according to Thomson Financial. That consists of three "strong buys," six "buys" and three "holds."

Altria generates half its revenue from overseas, so its earnings and cash flow are hurt by the rising value of the dollar.

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

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