The domestic tobacco stocks are probably one of the best places to look when looking for income. This sector includes companies such as Altria Group (MO), Reynolds American (RAI), and Lorillard Inc. (LO). Clicking on their names will lead you to a more in-depth analysis on each stock. This article will attempt to see which of these stocks is the best pick in this sector. Before I get started, let us take a look at the company descriptions from Reuters:
Altria Group, Inc., incorporated in 1985, is a holding company. As of December 31, 2011, Altria Group, Inc.'s wholly owned subsidiaries included Philip Morris USA Inc. (PM USA), which is engaged in the manufacture and sale of cigarettes and certain smokeless products in the United States; UST LLC, which through its direct and indirect wholly owned subsidiaries including U.S. Smokeless Tobacco Company LLC (USSTC) and Ste. Michelle Wine Estates Ltd. (Ste. Michelle), is engaged in the manufacture and sale of smokeless products and wine; and John Middleton Co. (Middleton), which is engaged in the manufacture and sale of machine-made large cigars and pipe tobacco. Philip Morris Capital Corporation (PMCC), another wholly owned subsidiary of the Company, maintains a portfolio of leveraged and direct finance leases. In addition, Altria Group, Inc. held a 27% economic and voting interest in SABMiller plc (SABMiller) as December 31, 2011. As of December 31, 2011, Altria Group, Inc.'s segments included cigarettes, smokeless products, cigars, wine and financial services. source
Reynolds American Inc. , incorporated on January 2, 2004, is a holding company. The Company's operating subsidiaries include cigarette manufacturer in the United States, R. J. Reynolds Tobacco Company; the smokeless tobacco products manufacturer in the United States, American Snuff Company, LLC (American Snuff Co); the manufacturer of cigarette brand, Santa Fe Natural Tobacco Company, Inc. (SFNTC), and Niconovum AB. RAI operates in three segments: RJR Tobacco, American Snuff and Santa Fe. The RJR Tobacco segment consists of the primary operations of R. J. Reynolds Tobacco Company. The American Snuff segment consists of the primary operations of American Snuff Co. Santa Fe manufactures and markets cigarettes and other tobacco products under the NATURAL AMERICAN SPIRIT brand. On February 28, 2011, RAI completed the sale of Lane Limited. RJR Tobacco is the cigarette manufacturer in the United States. RJR Tobacco's selling cigarette brands were CAMEL, PALL MALL, WINSTON, KOOL, DORAL and SALEM in the United States as of December 31, 2011. source
Lorillard, Inc. (Lorillard) is the manufacturer of cigarettes in the United States. Its Newport is a menthol flavored premium cigarette brand. During the year ended December 31, 2011, the Newport brand accounted for approximately 88.4% of its sales revenue. In addition to the Newport brand, its product line has four additional brand families marketed under the Kent, True, Maverick and Old Gold brand names. These five brands include 43 different product offerings. During 2011, it shipped 40.7 billion cigarettes, all of which were sold in the United States and certain the United States possessions and territories. Lorillard produces cigarettes for both the premium and discount segments of the domestic cigarette market. It sells its products primarily to wholesale distributors, who in turn service retail outlets, chain store organizations, and government agencies, including the United States Armed Forces. In April 2012, it acquired all of the assets of blu ecigs. source
Let us first take a look at the price action for these stocks over the past 4 years:
MO data by YCharts
We can see that these three stocks have traded very similarly over the past 4 years. Lorillard has been the best performer, up over 111%, while Reynolds and Altria have been slightly lagging, up only 105% and 106% respectively. Meanwhile, the S&P has only risen 53% in this time frame. These domestic tobacco stocks have all crushed the index during this time frame.
Now, let us look at the TTM PE ratio for these three stocks:
MO PE Ratio TTM data by YCharts
Note how similarly these companies are priced by the market. The cheapest in terms of earnings appears to be Lorillard, with a TTM PE of 14.0. Altria and Reynolds are slightly more expensive, with PE ratios at 17.3 and 16.5 respectively.
Next, we will take a look at TTM net income:
MO Net Income TTM data by YCharts
We can see that Reynolds has outperformed its peers in growing its income. TTM net income for Reynolds has increased over 70% since 2009. TTM income for Altria and Lorillard has only increased 20% and 23% respectively.
TTM EPS and 2013 EPS Estimates
No look at earnings is complete without also looking at TTM earnings per share:
MO EPS Diluted TTM data by YCharts
We can see that on a per share basis, earnings for these three companies have all increased. However, the biggest winner here is once again Reynolds, with its EPS increasing 74% in 4 years. Lorillard has also seen its EPS increase by 58% since 2009. Lagging behind is Altria, seeing only a 22% increase in EPS in 4 years.
2013 EPS Estimates
Now, looking at 2013 EPS estimates; Altria is expected to post an increase of 7.7% in EPS for FY 2013. Reynolds is expected to post an increase of 5.8% in EPS for FY 2013. While, Lorillard is expected to post an increase of 8.6%.
TTM Revenue Per Share
Next, let us take a look at TTM revenue per share:
MO Revenue Per Share TTM data by YCharts
We can see that Lorillard once again dominates with revenue per shares more than doubling in 4 years. Altria has also seen some revenue per share growth, increasing it by 28%. However, Reynolds revenue per share has actually seen a decline of 3% in 4 years.
We will now take a look at the balance sheets for these companies:
MO Net Financial Debt data by YCharts
Reynolds has actually managed to lower its debt since 2009 by 17%. Altria has essential maintained its debt at similar levels to 2009, only increasing it by 1%. However, Lorillard net financial debt has actually ballooned by 123% in 4 years.
Dividends, Buybacks, and Net Payout Yield
Finally, let us examine these companies dividend and share buybacks:
MO Dividend Yield data by YCharts
First a note on the "Net Payout Yield": This metric includes the dividend yield plus the stock buybacks expressed at a yield. So say a stock pays out a 5% dividend and repurchases 5% of its shares, the net payout yield would be 10%.
All three companies offer similar dividend yields. Reynolds is currently the highest yielding, with a 5.8% yield, Altria is second with a 5.7% yield, while Lorillard offers a 5.4% yield. Now, adding share buybacks, we can see the "net payout yield". Reynolds has the best TTM net payout yield near 10%. Lorillard also offers a high TTM net payout yield of 9.3%. Altria lags its peers in this metric, only offering a TTM net payout yield of 6.3%.
I feel that all three of these companies are fine choices for income seeking investors. Though, if I had to pick one, Lorillard seems like the best value. It has the lowest PE while also being projected to grow EPS by 8.6% for 2013. Lorillard also has a fairly large share buyback program in place, and I also believe it will increase its dividend this quarter. Its last two increases took place in Q1 2012 and 2011.