Altria's Success Story in 2 Simple Sentences

By Dan Caplinger Markets Fool.com

Altria Group (NYSE: MO) is one of the best-performing stocks of all time. Building on the success of its Marlboro cigarette brand, Altria has gone through huge transformations over the course of its history and faced plenty of threats. Yet when you look at what has made it so successful, as The Wall Street Journal did over the weekend, it really boils down to two things. First, Altria has found a way to survive despite an onslaught of attacks that many believed would eventually drive the tobacco company bankrupt. Second, Altria has used its brand awareness to create pricing power, and price increases have helped the cigarette maker produce growth in revenue and profits even as sales volumes have declined steadily over the years.

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How Altria overcame existential threats

Altria has dealt with threats to its very existence for decades. In the mid-1960s, the first wave of regulation started to affect the tobacco industry, with an official report from the U.S. Surgeon General leading to the imposition of warning labels on cigarette packing. Bans on advertising on television and radio followed by 1970. Slowly but surely, efforts to ban smoking gained momentum. Smoking on airplanes came to an end in 1988 for flights shorter than two hours, and the late 1990s brought smoke-free flights of all lengths.

Image source: Altria Group.

Meanwhile, litigation became an even bigger threat. Lawsuits alleging health impacts from smoking were numerous, and Altria and its peers did their best to fend off individual cases. Yet by the late 1990s and early 2000s, many thought that product liability claims might deal the same deathblow to cigarette manufacturers that companies in industries like asbestos manufacturing had suffered. Even though Altria avoided that fate, it and its industry rivals still ended up paying huge settlements to government bodies that put a strain on their profitability.

How Altria addressed these threats was interesting. At some points, the company sought to expand its reach, getting into the food business in an effort to diversify its exposure. Yet in the end, investors didn't like the fact that other businesses were effectively penalized by being associated with the core tobacco segment. Spinoffs resulted, leaving Altria highly concentrated in its core U.S. tobacco business and giving shareholders an almost pure play on the success of tobacco going forward.

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Making the most of market power

The net impact of negative publicity and anti-smoking efforts has been a dramatic drop in cigarette sales volume. Even as other players in the industry have dropped out or merged, the number of cigarettes sold in the U.S. has dropped by roughly a third over the past dozen years.

But what Altria did was to recognize the fact that those customers who chose to remain smokers would be willing to pay more in order to get their favored brands. Even as taxes have risen, Altria has been able to get more revenue per pack of cigarettes. Efforts to be more efficient have also helped boost bottom-line figures, and that growth in turn has contributed to massive share price gains for Altria over time.

Can Altria keep growing?

The question that investors in Altria have to keep at the front of their minds is whether there's a point at which its highly successful strategy will no longer work. Up to a certain point, accepting falling demand in exchange for higher prices can boost profits. But above that key inflection point, price increases could make enough customers stop buying Altria product that it is no longer successful in raising net income. If that happens, then Altria and its peers will have to find another answer or else finally face the downward spiral that so many commentators have expected it to hit long before now.

For now, though, Altria is comfortable with its strategic vision, and its customers appear to be on board with the program as well. Having defied skeptics until now, there's every reason to think that Altria will find a way to move forward successfully in the years to come.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.