Investors have relied on tobacco giant Altria Group for decades to deliver strong total returns, due in large part to its impressive dividend. With the stock yielding more than 4% in dividends, Altria has gained more than30% so far this year. Yet for several reasons, 2015 bring even more good newsfor Altria. Let's see what's in store for the tobacco company in 2015 and what it must do to produce another high-return year for investors.
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Reynolds-Lorillard merger: More bark than bite?One concern that has hung over Altria shareholders is the impending merger of rivals Reynolds American and Lorillard . Prior to their announced tie-up, Reynolds and Lorillard were both considerably smaller than Altria, posing threats in certain niche markets but generally lagging far behind the strong market share of Altria's Marlboro brand. With the merger, however, many investors worry the larger combined Reynolds-Lorillard will pose a stronger competitive threat to Altria, and that could cause margin erosion and a loss of pricing power exactly when Altria must be able to raise prices in order to stabilize revenue amid falling cigarette sales volume.
Reynolds American has high hopes for its post-merger success, with the company having shifted its focus to its Camel and Pall Mall brands. That strategic move, which emphasizes the major brands Reynolds will keep after the merger is complete, resulted in stronger volumes for those products, and rising market share combined with higher unit sales helped lift adjusted earnings per share by more than 10% in the company's most recent quarter. In addition, even though it plans to divest the blu eCigs line of tobacco-alternative e-cigarettes after the merger, Reynolds remains committed to its Vuse brand to continue to compete against Altria and its MarkTen.
Nevertheless, in some ways, Altria is in a no-lose situation with respect to the Reynolds-Lorillard merger. On one hand, there's still a substantial chancethe merger won't pass regulatory muster--and if the deal doesn't happen, then Altria is likely to enjoy a nice move upward.Yet even if the merger does go through, expectations are sky-high for the results, and anything short of perfection could disappoint Reynolds shareholders to the benefit of Altria. In other words, Reynolds would need a huge win from its merger to live up to the hype surrounding the deal, and only in that event would Altria likely see further downside from post-merger competition.
International investors come homeThe other factor favoring Altria these days is the international currency market and its impact on tobacco sellers in foreign markets. Specifically, the U.S. dollar has been exceedingly strong lately, and that has hurt the results of Altria's former subsidiary, Philip Morris International . With Philip Morris seeing many of the same regulatory and business obstacles that Altria faces in the U.S., it has been hard-pressed to offset volume declines with sufficient price increases in local-currency terms to make up for the dollar's strength. Altria, by contrast, benefits from its presence in the strengthening U.S. economy, and currency issues don't have a marked impact on its results.
In the past, currency impacts have been cyclical, and sustained periods of dollar strength have generally given way to stronger foreign currencies in subsequent years. Yet with the Federal Reserve looking to start tightening its monetary policy even as policymakers in Europe, Japan, and other nations examine strategies to support their struggling economies, Altria's supremacy could well continue into the future.
Is Altria Group worth buying?With weak inflation giving the Fed the latitude to be slow and methodical in its rate-tightening, Altria's dividend yield will be high enough to entice many investors into taking on stock market risk to reap greater income. Altria isn't incredibly cheap, but it has enough going for it that if favorable conditions continue, 2015 could prove to be another good year for the tobacco giant and its shareholders.
The article Why 2015 Could be the Year to Buy Altria Group Stock originally appeared on Fool.com.
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