After my previous article, highlighting the safety of tobacco yields within the U.S. domestic market, I am now looking at yields of international firms. Unlike the majority of U.S.-listed tobacco, international tobacco has a much larger customer base. Having brought most of the international rights from U.S. producers, International producers are able to access a much larger and diversified market.
So how safe are international tobacco yields? Are they more secure than the current U.S. offerings?
1. British American Tobacco PLC (BTI)
Overview
2012 EST. | ||||
Share price | EPS | Dividend | Yield | Dividend Cover |
$105.5 | $5.12 | $3.84 | 4% | 1.3 |
Cash Flow Statement
$US millions | 2010 | 2011 | 2012. Est. |
Net Operating Cash Flow | 3970 | 4070 | 5000 |
Net Investing Cash Flow | -512 | -793 | -857 |
Cash Dividends Paid - Total | -2090 | -2090 | -4078 |
Repurchase of Common & Preferred Stk. | -59 | -873 | -1559 |
Issuance of long term debt (Reduction) | (707) | 44 | 1164 |
Net Financing Cash Flow | -3280 | -3470 | -4890 |
Free Cash Flow | 1380 | 1200 | 277 |
Free Cash Flow ex debt buyback/issue | 2087 | 1156 | -1163 |
British American Tobacco is the second-largest tobacco company in the world, after Philip Morris. This shows through in its cash flow. However, British American does have a significantly higher free cash flow than PM. BTI is not so focused on stock buy backs like PM and free cash flow significantly benefits from this. BTI was buying back debt in 2010 and only issued a nominal amount in 2011. Although a significantly higher dividend this year has pressured the company to issue debt.
2. Imperial Tobacco Group PLC (ITYBY.PK)
Overview
2012 EST. | ||||
Share price | EPS | Dividend | Yield | Dividend Cover |
$80.2 | $6 | $3.7 | 4.6% | 1.6 |
Cash Flow Statement
£UK MILLIONS | 2010 | 2011 | 2012 |
Net Operating Cash Flow | 2280 | 2000 | 1690 |
Net Investing Cash Flow | -228 | -348 | -151 |
Cash Dividends Paid - Total | -773 | -892 | -900 |
Repurchase of Common & Preferred Stk. | 5 | -178 | -582 |
Issuance of long term debt (Reduction) | 981 | (54) | (151) |
Net Financing Cash Flow | -28 | -1816 | -2269 |
Free Cash Flow | 1240 | 771 | -540 |
Free Cash Flow ex debt buyback/issue | 259 | 825 | -389 |
Imperial Tobacco does have the second-best dividend cover in the group, on par with Philip Morris. Unlike the rest of the tobacco sector Imperial does not spend a huge amount on stock purchases. This is due to the fact Imperial is still seeing growth within its product range, reducing the need to push EPS up through buybacks. This gives Imperial one of the best constant free cash flows.
3. JAPAN TOBACCO (JAPAF.PK)
Overview
2012 EST. | ||||
Share price | EPS | Dividend | Yield | Dividend Cover |
$29.5* | $2.04* | $0.6* | 2.4%* | 3.4* |
Approximate figures after stock split.
Cash Flow Statement
$US MILLIONs | 2011 | 2012 |
Net Operating Cash Flow | 4929 | 6682 |
Net Investing Cash Flow | -1526 | -1257 |
Cash Dividends Paid - Total | -678 | -945 |
Repurchase of Common & Preferred Stk. | -242 | - |
Issuance of long term debt (Reduction) | 751 | (2423) |
Net Financing Cash Flow | -2245 | -3381 |
Free Cash Flow | 3640 | 5476 |
Free Cash Flow ex debt buyback/issue | 2889 | 7899 |
Japan Tobacco is the biggest tobacco company in the world. It is only the 3rd-biggest producer though due to its diversification into other markets such as food and pharmaceuticals. However the company does not return a significant amount to its shareholders with the dividend yield the lowest in the group, although the cover is the highest. The company also has one of the highest free cash flows due to low pay-outs.
Looking into international Tobacco producers has provided a different picture. While U.S. tobacco is usually focused on its home market these international producers are operating worldwide and have significantly better cash flows because of it.
The conclusion - most international producers do have cash flows and dividends that look significantly safer than domestic producers in the U.S. Even compared with Philip Morris. All of these international firms have to borrow significantly less to support returns to shareholders.
Disclosure: I am long ITYBY.PK.
