Altria Group, parent enterprise of Philip Morris USA and its popular Marlboro cigarette brand, has justified its reputation as a defensive investment- assuring investors with stable profits, and a dividend income of 5.5%. That is more evident in an environment in which money market rate of interest are lower than 0.5% and 10-year Treasury bonds are producing less than 2%. That is why it is not a surprise that the Richmond, Va.-based company has faced its shares increase 46% within the past years, significantly exceeding the Standard & Poor’s 500-stock index, which is higher by 13% in the same time period. In 2010, Altria shares constituted 20%while the active market finished the year in the same way it started.

The shares seem quite expensive, taking into account particular risks associated with Altria and its rivals in the tobacco industry. Currently reaching a 52-week high of $30.40, a record high level after adapting for the spinoffs of Kraft Foods and Philip Morris International, Altria is selling at mid-teen multiples while producing revenue increase in the high single-order. Funded on multiples of enterprise value to EBITDA, Altria, as well as others from the group, are trading higher than their four-year averages.

As the stocks have increased, the prolonged and constant decrease in U.S. cigarette sales has accelerated in the past year, with volumes dropping approximately 4% despite a weak economy and present public fight against smoking. “Operation environment in the USA tobacco industry are more complicated than usually recognized,” said David Adelman, tobacco expert at Morgan Stanley. To a certain degree, the industry has opposed decreasing volumes with price hikes, but the pricing power has slowed down as smokers’ demographics have modified, making the industry more reliant on those smokers who can who can least afford the cigarettes mainly in difficult times of economic stress.

The number of teen smokers continues to decrease. Regulatory doubtfulness has risen since the Food and Drug Administration attached tobacco to its bailiwick in 2009. Legal proceeding continues to be a serious challenge. Altria, which is considered the largest U.S. cigarette producer in terms of profit ($16 billion) and commercial price ($60 billion), seems to be rather exposed to industry misfortunes, as its famous Marlboro brand has been losing market share. It is also affected by the great debt burden after its 2009 purchase of smokeless tobacco producer UST for $11.7 billion. Altria’s shareholder friendly actions as increasing its dividend could become less possible. Investors would do better to lock in profits in the stock now, before they are exhausted.

By Sara Norton, Staff Writer. Copyright © 2011 Cigarette-Store.org. All rights reserved.