Stock of the Week
NYSE Symbol: MO
Price as of 10/16: $18.27
The market hit a milestone this week with the Dow Jones Industrial Average hitting 10,000 for the first time in over a year. The Dow is up 14% for the year and is up 55% from the March lows. It's been a phenomenal run. This week we'll feature the Dow component with the highest dividend yield which is 7.5%. The featured stock of the week is the nation's largest cigarette maker, Altria. Altria is not only the best dividend stock within the Dow but is in the top ten within the S&P 500 and sports a very low valuation. This week, Credit Suisse upgraded the tobacco sector rating to overweight saying that tobacco prices are rising faster than any other U.S. sector and that prices are rising even fastest in Europe. The higher prices is a reflection of the high barriers to entry in the industry and a high concentration with just a few cigarettte makers. Good news for the sector, industry, and income investors looking for great dividend stocks.
Back in July, Altria reported strong earnings of $1.01 billion or 50 cents a share, beating estimates by 3 cents. Revenue grew 33% to $6.72 billion from $5.05 billion largely due to higher prices that included the 62-cent-per-pack federal excise tax increase that went into effect on April 1st. Altria also credited its January acquisition of smokeless tobacco company US Tobaaco which makes Copenhagen and Skoal for the better results. Like other U.S. tobacco companies, Altria is focusing on cigarette alternatives for sales growth because domestic cigarette consumption is falling 3% to 4% a year. The company's smokeless tobacco volume declined 3.4% during the quarter, but it expects long-term growth in the segment of 6% or more. Altria said it cut costs about $25 million in the second quarter and expects to save about $695 million more by 2011. The company also said its previously announced plan to cease production at its Cabarrus County, N.C., cigarette factory by the end of this month will deliver annual cost savings of $188 million by 2011 and help bring its manufacturing capacity in line with declines in U.S. cigarette volume.
Going forward, Altria lifted its full-year outlook for adjusted earnings from continuing operations to a range of $1.72 to $1.77 per share. Previously, the company predicted earnings of $1.70 to $1.75 per share.
Thanks to these strong results, Altria was allowed to raise their dividend. The new dividend is now 34 cents a per share, up from 32 cents per common share, boosting the yeild to 7.5%. Valuation of the stock is also compelling. Altria trades for a PE of 10 times this years earnings and 9.6 times next years earnings. The stock also trades for 2 times sales. Even with the run up in the major averages, Altria provides great value and a great dividend for income investors.