It's probably foolish to think that smoking will ever go away entirely. The health risks have long been decided, but people have their vices and smoking has long been among them. That said it seems like governments around the world are on the same page when it comes to reducing the number of places people can smoke, and increasing the cost of doing so. That suggests an ever-shrinking window for Altria (NYSE:MO), but investors can likely wring a great deal of cash flow for many years to come.

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Year-End Results Come in as Expected
Altria's earnings are often a mess, but the company's fundamental performance was more or less in line with expectations. Revenue net of excise tax rose 5%, as weaker cigarette volumes were offset by better performance in smokeless tobacco.

Margins and profits continue to stay reasonably healthy. So-called operating company income (on an adjusted basis) rose almost 9%, and the company's share count continues to shrink. By segment, cigarette earnings before interest and tax grew almost 14%, while smokeless tobacco earnings grew about 4%. (For related reading, see A Clear Look At EBITDA.)

Still Fighting for Share
The tobacco "pie" isn't getting any larger in the United States, so maintaining brands is critical. To that end, Altria is having mixed success. The 3% adjusted decline in cigarette volume this quarter basically matched the industry, but key brand Marlboro's share slipped very slightly. Altria is still the 800-pound gorilla in the U.S., though, with roughly half the market and well more than Reynolds American (NYSE:RAI) and Lorrilard (NYSE:LO).

The story is a little different with smokeless tobacco, where Altria saw nearly 10% volume growth. As smoking becomes increasingly stigmatized, more and more smokers are shifting to smokeless tobacco. It's also not hurting Altria that the U.S. government is making it increasingly difficult to export smokeless tobacco into the country, leaving only very few companies like Swedish Match with the willingness and ability to compete.

Pushing for Growth
What can Altria do to make more money? Much is made of the price inelasticity of vice products like tobacco, but that's really not true. There's always a price-point where people cut back or switch brands.

At the same time, there's arguably not much slack left in the company from an operational perspective. That suggests to me, then, that the company's best option is to pressure its supply change - pushing on companies like Universal (NYSE:UVV) for better leaf tobacco pricing, and companies like Glatfelter (NYSE:GLT) for better pricing on filters and packaging.

The Bottom Line
For companies like Philip Morris International (NYSE:PM), British American Tobacco (AMEX:BTI) and Imperial Tobacco (OTCC:ITYBY) there's still some international growth potential as improving economic conditions allow smokers in emerging markets to upgrade their tobacco options. At the same time, a lot of emerging markets heavily regulate or product their markets, so it's not exactly a profitable free-for-all. (For related reading, see What Is An Emerging Market Economy?)

In many respects, Altria is like a royalty trust. There isn't going to be much market growth, but the company can reap a meaningful amount of earnings and cash over the coming decades, assuming that the federal government (whether through lawsuits or health regulations) allows them to. That leaves Altria as a reasonable, though not particularly cheap, income play.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  3. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  4. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  5. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  6. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  7. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  8. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  9. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  10. Stock Analysis

    GoPro's Stock: Can it Fall Much Further? (GPRO)

    As a company that primarily sells discretionary products, GoPro and its potential falls right in line with consumer trends. Is that good or bad?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center