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In this article, three low beta, high-dividend tobacco stocks are presented, including Philip Morris International Inc. (PM), Lorillard, Inc. (LO), and Altria Group, Inc. (MO). All three stocks generate strong cash flow and will enhance investors' portfolios with consistent income.

Philip Morris International Inc.

Philip Morris International Inc. is a holding company, engaged in the manufacture and sale of cigarettes and other tobacco products in markets outside the United States of America. According to the report from Morningstar, Philip Morris International's premium positioning of its strong brands, global scale, and addictive products give the firm a wide economic moat, where Asian operations will continue to be an engine for the firm's future growth. PM was up 0.04% and closed at $91.60 on February 26, 2013. PM had been trading in the range of $81.10-$94.13 in the past 52 weeks. PM has a beta of 0.86.

On February 13, 2013, Nomura Securities upgraded PM from Reduce to Neutral with a price target of $94.80 (from $92.80). Analysts have a mean target price of $97.19 and a median target price of $96.00 for PM. Analysts, on average, are expecting an EPS of $1.35 with revenue of $7.55B for the current quarter, ending in March, 2013. For 2013, analyst are predicting an EPS of $5.78 with revenue of $32.66B, which is 4.10% higher than 2012. Analysts are estimating the growth rate of 11.60% for the next five years (per annum).

There are a few positive factors for PM:

  • Higher revenue growth (3-year average) of 7.6 (vs. the industry average of -1.9)
  • Lower P/S of 2.0 (vs. the industry average of 2.3)
  • PM generates an operating cash flow of $9.42B with a levered free cash flow of $7.63B
  • PM offers an annual dividend yield of 3.71%

Technically, the MACD (12, 26, 9) is showing a bullish trend, but the MACD difference continues to converge. The momentum indicator, RSI (14), is indicating a slightly bullish lean at 58.35. PM is currently trading above its 50-day MA of $88.05 and 200-day MA of $87.40. The next resistance is $93.55, the R2 pivot point, as seen from the chart below.

(click to enlarge)

Source: StockCharts.com

Lorillard, Inc.

Lorillard, Inc. is the manufacturer of cigarettes in the United States. Lorillard's principal products are marketed under the brand names of Newport, Kent, True, Maverick and Old Gold with sales in the United States of America. Lorillard enjoys a wide economic moat due to the extraordinary strength of its flagship brand, Newport, a menthol flavored premium cigarette brand. LO was down 1.84% and closed at $40.05 on February 26, 2013. LO had been trading in the range of $36.70-$47.02 in the past 52 weeks. LO has a low beta of 0.37. LO is scheduled to go ex-dividend on February 27, 2013.

Analysts have a mean target price of $45.78 and a median target price of $46.00 for LO. Analysts, on average, are expecting an EPS of $0.64 with revenue of $1.12B for the current quarter ending in March, 2013. For 2013, analysts are predicting an EPS of $3.09 with revenue of $4.93B, which is 6.30% higher than 2012. Analysts are estimating a growth rate of 9.00% for the next 5 years (per annum).

There are a few positive factors for LO:

  • Higher revenue growth (3-year average) of 8.2 (vs. the industry average of -1.9)
  • Higher operating margin of 28.4% (vs. the average of 23.4%)
  • Lower P/E of 14.5 (vs. the industry average of 17.6)
  • Lower Forward P/E of 12.1 (vs. the S&P 500's average of 14.0)
  • LO generates an operating cash flow of $1.17B with $1.16B levered free cash flow.
  • LO offers an annual dividend yield of 5.49%

Technically, the MACD (12, 26, 9) indicator had turned to show a bearish sign in the last trading day. The momentum indicator, RSI (14), is declining and indicating a slightly bearish lean at 47.31. LO had broken down and closed below its200-day MA of $39.68 in the last trading day. The next support is 50-day MA of $39.13, as seen from the chart below.

(click to enlarge)

Source: StockCharts.com

Altria Group, Inc.

Altria Group, Inc. is a holding company, which sells cigarettes, other tobacco products, machine-made large cigars, and pipe tobacco. Altria now operates primarily in the challenging U.S. tobacco industry, where U.S. cigarette volume is in secular decline. Tobacco manufacturing is still a lucrative business, and Altria is poised to generate steady medium-term earnings growth, according to Morningstar's report. MO was down 1.01% and closed at $34.30 on February 26, 2013. MO had been trading in the range of $29.76-$36.29 in the past 52 weeks. MO has a low beta of 0.48.

Analysts have a mean target price of $36.73 and a median target price of $36.00 for MO. Analysts, on average, are predicting an EPS of $0.53 with revenue of $4.04B for the current quarter ending in March, 2013. For 2013, analysts are projecting an EPS of $2.39 with revenue of $17.67B, which is 1% higher than 2012.

There are a few positive factors for MO:

  • Higher revenue growth (3-year average) of 1.4 (vs. the industry average of -1.9)
  • Higher operating margin of 39.4% and net margin of 22.5% (vs. the industry averages of 23.4% and 21.3%)
  • Lower Forward P/E of 13.7 (vs. the S&P 500's average of 14.0)
  • MO generates an operating cash flow of $3.90B with a levered free cash flow of $5.18B
  • MO offers an annual dividend yield of 5.13%

Technically, the MACD (12, 26, 9) indicator just turned bearish on the last trading day. RSI (14) is declining but still shows a slightly bullish lean at 52.12. MO is currently trading above its 50-day MA of $33.26 and 200-day MA of $32.94, as seen from the chart below.

(click to enlarge)

Source: StockCharts.com

How to Invest

While all three stocks offer stable cash flow, investors might want to wait for further price stabilization to establish the long-term positions for LO and MO, while MACD indicator had just turned bearish with declining RSI (14). For PM, a credit put spread option play of June 22, 2013, $85/$87.5 put can be reviewed, which will allow investors to gain some upside credit premium or to acquire stocks at a price below $87.5. Alternatively, investors can also review Consumer Staples Select Sector SPDR ETF (XLP), iShares High Dividend Equity ETF (VDC), and iShares High Dividend Equity ETF (HDV) to gain exposure to these 3 stocks.

Note: All prices are quoted from the closing of February 26, 2013. Investors and traders are recommended to do their own due diligence and research before making any trading/investing decisions.

Source: Enhance Income With These 3 Low Beta Tobacco Stocks