All things considered, it could have been worse. After Philip Morris International Inc. (NYSE:PM) delivered disappointing first quarter numbers last week, Altria Group Inc (NYSE:MO) shareholders were tacitly waiting to hear their serving of quarterly bad news on Thursday morning. But, they didn’t get it.

That’s not to say MO stock is bulletproof. It’s still down 26% since the middle of last year, and knocking on the door of lower lows as the company runs out of ways to keep revenues propped up and keep profits growing.

Altria’s gotten very, very good at keeping more and more plates spinning though, shrugging off a smoking cessation movement that’s just never going to go away.

Altria Earnings Recap

For the quarter ending in March, Altria earned an operating profit of 95 cents per share on revenue of $6.1 billion, up from a year-earlier top line of just a bit less than $6.1 billion, when it posted a profit of only 73 cents per share.

Adjusted revenue, which strips out excise taxes that make its products more expensive to buy, rolled in at $4.67 billion, up 2% year over year and higher than the $4.62 billion analysts were expecting.

Perhaps most important, earnings topped the figure of 93 cents per share of MO stock analysts were modeling for Altria’s first fiscal quarter of 2018.

Profits per share of MO were given a boost by the $513 million Altria spent to buy back eight million shares of Altria Group stock.

Revenue produced by smokeable products — cigarettes — fell less than a full percentage point year-over-year, with higher cigarette prices largely offsetting the 4.2% dip in the raw number of cigarettes shipping during the quarter. Adjusted for trade inventory movements, shipment volume fell 7%.

Smokeless tobacco product sales, meanwhile, grew nearly 13% year-over-year, but with a footnote… Altria underwent a voluntary recall of chewing tobacco products in the same quarter a year earlier, crimping sales during the first quarter of 2017.

CEO Marty Barrington commented on the first quarter results “Altria is off to a fast start to the strong year of EPS growth to which we’ve guided, with adjusted diluted EPS growth of 30.1% in the first quarter of 2018… Within the reporting segments, income performance reflects the timing of previously announced investments for the long-term strength of the business.”

A Slow Burn

The Altria Group earnings report — and the market’s response to it — was markedly different than that of rival Philip Morris posted just a few days ago.

PM stock fell 4% last week following a fairly significant revenue shortcoming and a warning that demand in China wasn’t as robust as hoped. MO stock fell sharply at the time too, in step with the Philip Morris tumble, but Thursday’s report suggests Philip Morris’ headwind don’t universally apply to the industry.

And yet, there’s an 800 pound gorilla in the room that does apply universally… a well funded anti-tobacco industry that continues to get traction. Altria reported that, domestically, industry-wide cigarette volumes declined by 5.5%. Sales of smokeless tobacco products, by volume, were off to the tune of 1%. On both fronts, the recent declines are part of a long-standing trend.

Altria has managed to continue growing the top and bottom line, to its credit. A closer look at the details, though, makes it clear that the bulk of that top-line growth has been the result of acquisitions, while stock buybacks have produced most of the improvement in per-share profits. Cash flow and total net income growth have been stale and struggling for years now.

You can (not surprisingly) blame the headwind on the rise of e-cigarettes. Altria has been and continues to address that market, but it’s a market presently dominated by a company called Juul Labs.

It’s also a market that isn’t terribly profitable. As Mad Money’s Jim Cramer pointed out following Philip Morris’ first quarter report, “While the tobacco companies can get into the vaping business, their own vape pens tend to be money losers. Who would want to swap out of an incredibly profitable business and into one that’s losing money?”

Still, the cigarette giant remains a cash cow, paying a decent dividend it can actually afford to pay. This may be a trade with a time limit it on it, but for the time being, its expiration date is further down the road than most investors can see.

Looking Ahead for MO Stock

For all of 2018, Altria Group said it’s now looking to post earnings of between $3.90 and $4.03, versus the consensus estimate of $3.98. That figure would be well up from 2017’a total profit of $3.39 per share, though analysts only expect revenue to grow a little less than 2%, to $19.76 billion.

Earnings growth is expected to outpace sales growth at least in part because the company still has a little more than $500 million left to spend of a previously-announced $1 billion stock buyback. Altria Group expects that remaining budget to be used to that effect by the end of 2018.

Of that consensus estimate of $3.98, $2.80 will be dished out as dividends given Altria’s recently-increased payout. That translates into a dividend yield of right around 5.0%, given the current value of Altria Group stock.

— James Brumley

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Source: Investor Place