Q. Several mutual funds that I own hold the shares of Altria Group Inc. Any guess as to what its future holds? - B.R., via the Internet
A. Here's why mutual funds own tobacco company shares despite health issues, related lawsuits and the gradual decline in the percentage of Americans who smoke:
Cigarettes are cheap to make, brand-loyal smokers accept price increases and the firms generate tons of cash.
The stock of Altria (MO) is up 10 percent this year after gains of 18 percent last year and 43 percent in 2003. This cash-rich firm provides a 4.32 percent dividend yield for investors and actively repurchases its own shares.
Second-quarter profits of the maker of Marlboro and Parliament rose 1.5 percent. Its Philip Morris USA subsidiary increased its market share from 49.8 percent to 50 percent, while its international sales were up 5 percent thanks to higher sales in Eastern Europe, the Middle East and Africa.
The latest positive buzz about Altria stock, however, involves the prospects for the eventual breakup of the company. Steps to spin off Kraft Foods Inc. and later Philip Morris International could be accelerated if Altria scores victories in a tobacco industry federal racketeering case now awaiting a ruling and in legal cases in Florida and Illinois.
That's no certainty, and court decisions remain the primary industry risk and cause of stock volatility. But confidence in the stock has risen since the rejection by a federal appeals court in February of a Justice Department claim for $280 billion of past profits from the tobacco industry. The Justice Department has asked the Supreme Court to overturn that ruling.
The analyst consensus recommendation on Altria shares is currently a "buy," according to Thomson Financial. That consists of three "strong buys," six "buys" and three "holds."
There are some other considerations besides litigation. The company generates half of its revenue from overseas, so its earnings and cash flow are hurt by the rising value of the U.S. dollar. In addition, Kraft Foods Inc., in which Altria owns an 85 percent stake, had a 32 percent profit decline in the second quarter on higher commodity prices and a loss on the sale of its sugar confectionery business.
Altria earnings are expected to increase 8 percent in both 2005 and 2006, about the same as forecast for the cigarette industry, according to Thomson. The projected five-year annualized growth rate of 9 percent compares to 8 percent forecast for its peers.
Q. What do you think of Franklin Capital Growth Fund? I haven't been happy with it lately. - R.S., via the Internet
A. Its timing has been off.
The fund made the mistake of selling energy stock holdings such as BP PLC last year to take profits. Those stocks have continued their dramatic climb. It also was hurt by drug safety concerns that affected health-care holdings Pfizer Inc. and Biogen Idec Inc.
The $1.09 billion Franklin Capital Growth Fund Class "A" (FKREX) is down 1.63 percent this year, according to Morningstar, placing it in the lowest 2 percent of large-capitalization growth funds. Its three-year annualized return of 11.86 percent places it at the midpoint of its peers.
The fund has, however, become more broadly diversified and has experienced less volatility since Serena Perin Vinton was promoted to lead portfolio manager in 1999.
"Serena Perin Vinton is a little more cautious at times than other large-cap growth managers, and that philosophy may be a reason why the fund missed out on the ongoing energy rally," said Dan McNeela, an analyst with Morningstar Inc. "She's not generally looking for the fastest-moving growth stocks that are out there."
The management team uses a quantitative screen followed up with fundamental research to find growth companies with solid returns, strong cash flow and low valuations. It focuses mostly on stocks in the Russell 1000 index.
Nearly one-fourth of Franklin Capital Growth Fund assets are in health care and another one-fifth are in hardware. Other significant concentrations are business services and financial services. Its largest holdings were recently Amgen Inc., United Technologies Corp., Paychex Inc., Freddie Mac, Southwest Airlines Co., WellPoint Inc., Lowe's Companies Inc., Johnson & Johnson, Boston Scientific Corp. and Agilent Technologies Inc.
This 5.75 percent "load" (sales charge) fund requires a $1,000 minimum initial investment.
The Franklin Templeton fund family was implicated in the fund industry's market-timing scandal and eventually settled with federal regulators and the states of California and Massachusetts without acknowledging guilt. However, charges were not as serious as those against some other fund companies and it had initiated efforts to control market timing even before regulators got involved.
Q. I plan to apply for a mortgage in a year, but discovered my credit score isn't so great. How is my score determined and what can I do to fix it? - F.H., via the Internet
A. Your credit score, commonly referred to as a FICO score, is the system that creditors use to determine whether or not to give you credit. About 35 percent of your score takes into account your bill-paying history; 30 percent your total debt; 15 percent your credit history; 10 percent the types of credit you have; and 10 percent whatever new credit you have taken on.
"These days almost anyone can get approved for a mortgage, but the higher your credit score, the better the mortgage rates you'll get," said James Tehan, spokesman for the Myvesta.org nonprofit consumer education organization in Rockville, MD. "With a year to clean up your score, your most important steps are to pay everything on time and to try to lower your debt balances."
You might consider signing up for a credit card that offers a low introductory one-year rate, which is a common offer, so you can make better headway on paying off your balances, Tehan said. But if you use credit responsibly over the next year, you should see your score improve.
Editor's Note: Andrew Leckey answers questions for Bull & Bear readers only through the column. Address inquiries to Andrew Leckey, #184, 369-B Third St., San Rafael, Calif. 94901-3581, or by e-mail at andrewinv@aol.com.
