Tobacco Companies Raising Prices Despite Recession

Most retailers have been left with little choice other than to cut prices as consumers continue to tighten their belts. One company that is going against the grain, and has the muscle to do so, is Altria (MO).

On Thursday, the company announced that it would be raising prices on several brands of its cigarettes between $0.71 and $0.81 per pack. The decision was made in response to legislation that will up the federal tax on cigarettes by $0.61 per pack in April. Given the inelastic demand associated with tobacco products, I would expect these price increases to have little to no impact on consumer demand for cigarettes.

Cigarette shipment volume in the U.S. has been declining by a few percent each year in recent years, but companies like Altria, Reynolds American (RAI) and Lorillard (LO) have been able to offset this trend through price increases.

Altria and Reynolds American have also been moving into the smokeless tobacco arena which has become a growth sector in the U.S. In conjunction with the price hikes on its cigarettes, Altria said that it will be cutting the price of its Skoal and Copenhagen smokeless brand by $0.62 per can.

The market appears to have embraced these pricing moves as shares of Altria were up 3.7% in mid-afternoon trading action on Thursday.

I continue to like Altria with its rich dividend yield of 8.3%. In recent months, investors have grown weary of stocks with soaring dividend yields given the prevalence of companies cutting their dividends and the aftershock of such decisions. Make no mistake about it- Altria will not be cutting its dividend anytime soon. In late August, the tobacco maker actually upped its quarterly dividend by 10.3% to its current level of $0.32 per share.

Altria checked in with relatively sound fourth-quarter results when it reported its earnings in late January. The company announced a 5.7% spike in its adjusted diluted EPS from continuing operations on a 2.8% rise in net revenue on a year-over-year basis. Steady earnings growth has enabled shares of Altria to outperform the market in each of the past 3 years. The stock is well on its way to continuing its streak as shares of Altria are flat in 2009 while the S&P 500 (^GSPC) is down 21.0%.

James Cramer, my fellow colleague at TheStreet.com, has picked Altria as his Top Stock for 2009. I am also bullish on Altria and think that we will continue to see Altria’s total returns outpace the market over the long term.

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