A new star has joined the tiny universe of tobacco stocks. Altria spun off its overseas operations to shareholders on March 28, leaving Philip Morris International as the largest publicly traded tobacco company in the world. Only the state-owned China National Tobacco sells more cigarettes.
Although Philip Morris International has better prospects, you should consider owning both stocks, assuming you have no problems investing in tobacco. Tobacco companies can generate steady profits even in tough times, making the stocks ideal holdings in a weak economy.
The idea behind the split was to give Philip Morris International room to flourish. Existing shareholders of the widely held Altria (symbol MO) received one share of Phillip Morris International (PM) for each share of Altria stock owned as of March 19. PM shareholders own a broadly diversified global tobacco company with strong opportunities for growth.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
While tobacco use has waned for decades in the developed world, it is growing in China, Russia, India and other emerging nations. Philip Morris International, based in Lausanne, Switzerland, has just begun to exploit these key markets.
A beachhead in the tightly controlled Chinese tobacco market, the world's largest, gives PM an edge over competitors. It is the only tobacco company that has struck a standing deal with Chinese National Tobacco.
That means PM can sell its popular Marlboro brand of cigarettes and other products in China. Stifel Nicholas analyst Chris Growe estimates that achievement of a modest 10% market share in China over the next ten years would add nearly two percentage points annually to PM's growth in sales volume.
The company has not yet done much with its Chinese ventures because management had to deal with the spinoff. Now PM can make sure its agreement with China National Tobacco bears fruit. "It has the potential to be a significant part of the business and change the growth profile of the company," says Charles Norton, manager of the Vice Fund, which holds shares of both Altria and PM.
Beyond making inroads in China, PM's main task will be to push the Marlboro brand more overseas, Growe says. Marlboro is the dominant brand in the global tobacco market, with an 8.5% share excluding the Chinese market. That's four times the size of its largest rival.
Growe says new products, such as Marlboro Intense, Marlboro Filter Plus and Marlboro Fresh Mint, will give the brand more swagger internationally.
PM forecasts healthy earnings growth in 2008. Management says it thinks earnings per share will grow 12% to 14%, from $2.78 per share in 2007 (the $2.78 figure is pro forma -- that is, what PM would have earned last year if it were a separate company). Over the long-term, management expects to generate earnings growth of 10% to 12% a year.
The stock, which closed at $49.96 on April 18, is down 2% since the spinoff. It trades at 16 times the $3.20 per share that analysts, on average, expect the company to earn this year. Growe rates the stock a "buy" and thinks the shares are worth $58. Based on an annual dividend rate of $1.84, the stock yields 3.7%.
Altria has legal baggage and must cope with the declining demand for tobacco in the U.S. But the shares should benefit from stock buybacks and the company's effort to cut about $700 million in annual costs by 2011.
Based in Richmond, Va., Altria launched a $7.5-billion, two-year-long share repurchase program in April. Because Altria emerged from the spinoff will little debt, Growe says, the company could buy back even more stock.
Altria forecasts that shareholders should earn annualized total returns of more than 12%. The forecast is based on estimated long-term earnings growth of 8% to 10%, combined with Altria's dividend. The stock, which closed at $22.10 on April 18, yields 5.2% based on an annual dividend rate of $1.16.
Goldman Sachs analyst Judy Hong calls Altria her top pick among U.S. tobacco stocks. She gives the stock a "conviction buy" rating. "The shares are trading at a discount to its tobacco peers despite its 9% earnings per share growth prospects, superior market share and ample value-enhancing opportunities," she says. The strength of the Marlboro brand and other products will give Altria the pricing power to weather a downturn in U.S. sales volume this year, she says.
Altria shares trade at 13 times the $1.67 per share that analysts, on average, expect the company to earn this year. Hong has a 12-month price target of $28.
-
Think Twice Before Getting a Credit Card Cash AdvanceA credit card cash advance can be a quick solution when you need emergency help with money. But you'll pay for the convenience with high interest and fees.
-
What is AI Worth to the Economy?The Letter Spending on AI is already boosting GDP, but will the massive outlays being poured into the technology deliver faster economic growth in the long run?
-
If You'd Put $1,000 Into UnitedHealth Group Stock 20 Years Ago, Here's What You'd Have TodayUNH stock was a massive market beater for ages – until it wasn't.
-
What Tariffs Mean for Your Sector ExposureNew, higher and changing tariffs will ripple through the economy and into share prices for many quarters to come.
-
How to Invest for a Fall Interest Rate Cut by the FedA lot can happen between now and then, but the probability the Fed cuts interest rates in September is back above 80%.
-
Are Buffett and Berkshire About to Bail on Kraft Heinz Stock?Warren Buffett and Berkshire Hathaway own a lot of Kraft Heinz stock, so what happens when they decide to sell KHC?
-
How the Stock Market Performed in the First 6 Months of Trump's Second TermSix months after President Donald Trump's inauguration, take a look at how the stock market has performed.
-
If You'd Put $1,000 Into Berkshire Hathaway Stock 20 Years Ago, Here's What You'd Have TodayBerkshire Hathaway is a long-time market beater, but the easy money in BRK.B has already been made.
-
If You'd Put $1,000 Into Procter & Gamble Stock 20 Years Ago, Here's What You'd Have TodayProcter & Gamble stock is a dependable dividend grower, but a disappointing long-term holding.
-
My Three-Day Rule for Investing: And If it Applies NowStock Market I've seen a lot in my career. Here's what I see now in the stock market.
