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Thursday, August 03, 2006

The Altria Safe Habor

Stocks: (MO)(KFT)

There are no safe stocks. At least not in a market like this.

But, maybe one of two come close. Altria's stock now trades at $80, just off its 52-week high. In early 2003, it changed hands at $18. How many stocks with a 4% yield have risen 4x in under four years? If you find one, let us know.

The key to Altria's success is two-fold. Five years ago, Wall St. assumed that tobacco liability cases would bury the company in litigation and settlement costs. It never happened. The view of the court system is that, if you smoked and got sick, that was your problem. We warned you on every package. Smoking is bad for you.

Altria, then called Phillip Morris, decided to hedge its bets, It bought Kraft. Food was a nice boring business with very few risks. It could balance the investor perception that the tobacco industry had seen its best days.

Altria was wrong. The tobacco business got better. The price of cigarettes went up. Smoking dropped off in the U.S., but in places like China and Japan, Europe and South American, people still smoke like chimneys. Cash flow from the tobacco business could pay the national debt.

Kraft had serious problems. Its costs were too high and its mix of products was off center. But, the company recently replaced the CEO and announced it first decent quarter. The company, which traded at over $40 in late 2004, is not moving back up. It trades near its 52-week high of just above $33 and show signs of continuing its ascent.

When Kraft announced earnings in late July, profits were up 44% and the company raised full-year guidance. Altria's raised its guidance the same day. Altria owns 88% of Kraft.

Altria is a rare stock in the current market environment. It has a high yield and there are very few reasons for the stock to move down. If Kraft continues to do well, Altria may continue to move up nicely.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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