Seeking Alpha
Long only, value, contrarian, deep value
Profile| Send Message|
( followers)  

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 (NYSEMKT: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 (OTCQX:ITYBY)

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 (OTCPK:JAPAF)

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.

Source: How Safe Are International Tobacco Yields?