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Altria (MO) is the Best Tobacco Stock to Buy Now: Here's Why

After a slightly shaky start to the year, the U.S. economy is picking up momentum. With a drop in the unemployment rate, rising wages and decent consumer confidence, the economy appears to be improving despite rising pressure elsewhere.

Additionally, cheap oil and gas are boosting the spending power of American consumers.

Uncertainties Persist

Despite the positives, the falling oil prices remain a constant cause for concern as oil industry’s woes escalate with storage levels turning ‘critical’.

Further, bank stocks are slumping due to uncertainty over the rate hike and widening credit spreads. Investors are worried that a Fed rate hike now will result in greater turbulence, slowing down the domestic economy further.

Moreover, China started 2016 on a dismal note and plunged into the bear market territory. Last year, the country had surprised investors by devaluing its currency.

In view of the current economic uncertainties, investors are taking desperate measures to guard their wealth. Many are opting out of equity markets and investing in safe haven assets like treasuries and gold.

Tobacco: A Safe Haven

Even though a little unorthodox, tobacco seems to be a relatively safer sector to invest in at present. These companies stand to benefit from the addictive nature of tobacco. Per the World Health Organization, smoking rates have, in general, been declining in the developed countries, while rising in the developing ones, which account for nearly 80% of the one billion smokers worldwide. This figure is expected to grow and translate into steady sales and attractive yields for investors.

How the Year Went for Altria  

Altria Group Inc. MO might be an intriguing investment choice right now.

After the solid performance in 2014, this tobacco maker delivered outstanding operating results in fiscal 2015. Adjusted earnings for the year increased 8.9% year over year to $2.80 per share and revenues grew 3.7% to $25.43 billion.

Revenues, net of excise taxes, went up 5.1% from the previous year to $18.85 billion.

In fiscal 2015, the Marlboro owner stepped up innovation and expanded the distribution of MarkTen XL e-vapor products and Green Smoke e-cigarettes in several lead markets which should drive sales, going ahead.

Further, during the fourth quarter, Altria announced that it is implementing an initiative that is expected to deliver approximately $300 million in annual productivity savings by the end of 2017. Part of the savings - to be realized through reduced spending on certain infrastructure and it will be invested in brand building, harm reduction and regulatory capabilities. Such initiatives are expected to help the company reap higher profits over the long term.

Peers’ Performance in 2015

A major tobacco player, Reynolds American Inc. RAI, reported adjusted earnings of $1.98 per share which increased 15.8% year over year supported by higher cigarette and moist snuff pricing. The Zacks Rank #3 (Hold) company’s net sales increased 26% to $10.7 billion driven by higher sales in all the segments.

On the other hand, Philip Morris International Inc.’s PM earnings per share of $4.42 for fiscal 2015 slipped 12% due to soft sales. Net revenue went down 10% (up 5.8% excluding currency) to $26.8 billion because of lower shipment.

Dividend Yields for the Tobacco Players

Tobacco stocks reward investors with attractive yields. While Altria’s dividend yields 3.58%, Reynolds American and Philip Morris have a dividend yield of 3.34% and 4.09%, respectively.

Among all the three tobacco players Altria comes out as a winner based on its strong fundamentals, growth prospects and growing market share in the e-cigarette category.

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ALTRIA GROUP (MO): Free Stock Analysis Report
PHILIP MORRIS (PM): Free Stock Analysis Report
REYNOLDS AMER (RAI): Free Stock Analysis Report
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