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Do Altria's 2nd Quarter Earnings Make It A Buy Altria (NYSE:MO) manufactures and sells tobacco products in the US through its Marlboro, Copenhagen, Skoal, and Black Mild tobacco brands. The company sells wine through the St. Michelle's Wineries division. Additionally, Altria sells e vapor products through its Nu Mark division, which includes the MarkTen and Green Smoke brands. 2nd Quarter Results Altria has delivered first half adjusted earnings per share growth of 5.2%. The company expects full year earnings per share growth of between 7% and 9%. Altria divides its operations into 3 segments: Smokeable Products, Smokeless Products, Wine Smokeable Products Net revenues for the company's smokeable product segment net of excise tax increased 0.8% for the 2nd quarter of 2014 as compared to the 2nd quarter of 2013. Operating margins increased from 43% to 44.2% due to price increases. Adjusted operating income increased 3.6% due to the aforementioned net revenue increase and margin increase. The company's total smokeable product volume declined substantially in the quarter, down 4.8%. This is due to overall declines in the cigarette industry. Altria has managed to increase its prices to offset falling volume in the cigarette industry. Altria increased its market share of the US cigarette industry from 50.7% in the 2nd quarter of 2013 to 51% in the 2nd quarter of 2014. Marlboro is the leading cigarette brand in the US. The brand gained another 0.3% of market share this quarter. Smokeless Products Altria's smokeless category is made up primarily of the Copenhagen and Skoal brands. The division posted favorable results for the second quarter of 2014, growing revenue net of excise tax 0.7%, and increasing operating margins from 63.5% to 66.6%. Adjusted operating income grew 5.6% for the quarter. Smokeless product volume increased 1.6% on the quarter. The Copenhagen brand grew volume an impressive 7.8%, while Skoal volume fell 6.1%. Altria grew its overall share of the smokeless tobacco industry from 55% in the second quarter of 2013 to 55.1% for the second quarter of 2014. Copenhagen market share increased by 1.5 percentage points, while Skoal market share fell 1.1 percentage points. Wine The company's wine segment is its smallest operating segment by far. It is also the company's fastest growing segment. Wine revenue net of excise tax increased 6.8% for the 2nd quarter of 2014. Operating margins increased from 18.9% in the 2nd quarter of 2013, to 19.9% this quarter. Overall, operating income grew a strong 12% for the segment. e Vapor Altria continued to execute on its e Vapor strategy in the 2nd quarter of 2014. The company's MarkTen e vapor products began its national expansion. MarkTen is currently in 60,000 retail stores in the Western half of the US. Altria completed the acquisition of Green Smoke in the 2nd quarter, and expects to integrate Green Smoke into its business operations throughout the year. Shareholder Return Altria has a current dividend yield of over 4.5%, and expects to maintain a payout ratio of 80%. The company recently announced plans to repurchase another $1 billion worth of shares by the end of 2015, which amounts to about 1% of shares outstanding on an annualized basis. In addition to the company's strong dividend payments and share repurchases, shareholders can also expect organic growth from increasing margins, the company's SAB Miller investment, e Vapor products, and smokeless products. Source: Altria 2nd Quarter Earnings Release Consecutive Years of Dividend Increases Altria has increased its dividend 39 consecutive years, excluding the impact of spin offs. The company's long streak of dividend increases shows that Altria has a strong competitive advantage in the tobacco industry. Why it matters: The Dividend Aristocrats (stocks with 25 plus years of rising dividends) have outperformed the S 500 over the last 10 years by 2.88 percentage points per year. Source: S 500 Dividend Aristocrats Factsheet, February 28 2014, page 2 Dividend Yield Altria has a current dividend yield of 4.57%, the 6th highest out of 128 businesses with 25+ years of dividend payments without a reduction. The company's strong dividend yield is about twice as high as the S 500's yield. Why it Matters: Stocks with higher dividend yields have historically outperformed stocks with lower dividend yields. The highest yielding quintile of stocks outperformed the lowest yielding quintile by 1.76 percentage points per year from 1928 to 2013. Source: Dividends: A Review of Historical Returns Payout Ratio Altria has a current payout ratio of about 89%. The company has announced a target payout ratio of 80%. The company will not increase its dividend payments faster than overall company growth to its high payout ratio. Altria has the 116th lowest payout ratio out of 128 businesses with 25+ years of increasing dividends. Why it Matters: High yield, low payout ratio stocks outperformed high yield, high payout ratio stocks by 8.2 percentage points per year from 1990 to 2006. Source: High Yield, Low Payout by Barefoot, Patel, Yao, page 3 Long Term Growth Rate Altria has only grown revenue per share by 2.43% per year since spinning off Philip Morris and Kraft. The company's low revenue per share growth rate is somewhat misleading, as the company has grown by increasing its operating margin through raising prices. Altria has the 97th highest revenue per share growth rate out of 128 businesses with 25+ years of dividend payments without a reduction. Why it Matters: Growing dividend stocks have outperformed stocks with unchanging dividends by 2.4 percentage points per year from 1972 to 2013. Source: Rising Dividends Fund, Oppenheimer, page 4 Long Term Volatility Altria's long term standard deviation is only 20.29%. The company's low standard deviation is due to its insulation from economic downturns and relatively predictable cash flows which stem from selling a product that is very difficult to stop using. The company has the 21st lowest standard deviation out of 128 businesses with 25+ years of dividend payments without a reduction. Why it Matters: The S Low Volatility index outperformed the S 500 by 2 percentage points per year for the 20 year period ending September 30th, 2011. Source: Low Slow Could Win the Race, page 3 Conclusion Altria has a high dividend yield and low volatility, but also has a very high payout ratio and slow growth. The company rates near the middle of the pack based on the 8 Rules of Dividend Investing due to sluggish growth and a high payout ratio. Overall, Altria is best suited for investors in need of current income due to its high yield.