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By Siraj Sarwar

Because of seemingly endless cash flow and the massive size of its market, the tobacco industry is attractive for investors seeking income. Companies in this sector have been able to consistently pay out regular dividends, enabling many renown investors to achieve safe and high returns. Despite economic slowdowns, tobacco stocks appear to be recession resistant because tobacco is a basic need for millions of smokers.

In this article, I pick four tobacco companies for consistently growing returns. These four companies all have solid financial statements to back returns for investors. Let's review each company's financial situation to examine its ability to sustain growing returns for shareholders.

Philip Morris International, Inc. (NYSE:PM) is a holding company. The company through its subsidiaries manufactures and sells cigarettes and other tobacco products in markets outside the United States. With its premium positioning of strong brands, global scale, and addictive products, Philip Morris has been able to consistently raise its dividends. At present, the company offers a quarterly dividend of $0.85 cents/share. Below is a brief history of Philip Morris dividends.

Years

Dividend

2012

$3.24

2011

$2.82

2010

$2.44

2009

$2.24

2008

$1.54

Morningstar.com

How Dividends are Safe

2012

2011

2010

Revenue

$77,393

$76,346

$67,713

Operating Income

$13,846

$13,332

$11,200

Net Income

$8,800

$8,591

$7,259

Earnings Per Share

5.17

4.85

3.92

Morningstar.com [Revenue and Income in millions]

As the above table demonstrates, Philip Morris has been showing exceptional financial performance. Its income statement demonstrates a smart investment strategy, a strong brand and solid management. In the past three years, it was able to grow revenues at an average rate of 7.6%. In addition, in a high cost environment, the company was able to sustain similar margins. In the Trailing Twelve Months [TTM], its net margin stood at 11.4%. With a year over year increase in sales together with stable margins, in the past three years, on average, it was able to expand Earnings Per Share [EPS] by 16.9%.

2012

2011

2010

Cash From Operations

$9,421

$10,529

$9,437

Capital Expenditures

-$1,056

-$897

-$713

Free Cash Flow

$8,365

$9,632

$8,724

Morninstar.com [Figures in millions]

Furthermore, over the years, the company has shown strong cash flows. Over the past years, it has been consistently generating strong operating and free cash flows. Its free cash flows adequately cover divided payments. At the end of 2012, its free cash flow stood at $8,365 million while dividend payments accounted for only $5,404 million. It's free cash flows adequately cover dividend payments. Thus, dividends look safe with the potential to consistently generate strong cash flows. The company's financial health also seems to be in a strong position to continue to increase returns for investors.

Altria Group, Inc., (NYSE:MO) through its subsidiaries, manufactures and sells cigarettes, other tobacco products, machine-made large cigars and pipe tobacco. Over the years, Altria has been paying consistently increasing dividends. At present, the company offers a quarterly dividend of $0.44 cents/share. Below is a brief history of its consistently increasing dividends.

Years

Dividend

2012

$1.70

2011

$1.58

2010

$1.46

2009

$1.32

2008

$1.16

Morningstar.com

How Dividends are Safe

2012

2011

2010

Revenue

$17,500

$16,619

$16,892

Operating Income

$7,253

$6,068

$6,228

Net Income

$4,180

$3,390

$3,905

Earnings Per Share

$2.06

$1.64

$1.87

Morningstar.com [Revenue and Income in millions]

The company has been showing strong income statements over the past years. Though, revenue growth is slow due to difficult economic situations and increased regularities. Still, In the past three years, on average, its revenue growth stood at 1.3% when the industry average was at -1.9%. On the other hand, the company has one of the best operating margins of 41.4%, representing strong management. In addition, it has shown exceptional EPS growth of 10.2% in the past three years.

2012

2011

2010

Cash From Operations

$3,903

$3,613

$2,767

Capital Expenditures

-$124

-$105

-$168

Free Cash Flow

$3,779

$3,508

$2,599

Morninstar.com [Figures in millions]

Furthermore, over the years, the company has shown strong cash flows. Over the past years, it has been consistently increasing its operating and free cash flows. Its free cash flows adequately cover divided payments. At the end of 2012, its free cash flow stood at $3,779 million while dividend payment accounted for $3,400 million. With strong financial position and continue profitability, Altria Group looks like a safe pick. Wall Street analysts also recommend Altria Group a strong buy.

Lorillard, Inc (NYSE:LO) is engaged in the manufacture of cigarettes and tobacco in the United States. Lorillard offers one of the best dividends at a high yield. At present, the company offers a quarterly dividend of $0.55 cents/share. Below is a brief history of its consistently increasing dividends.

Years

Dividend

2012

$2.0667

2011

$1.7333

2010

$1.4167

2009

$1.28

2008

$0.6133

Morningstar.com

How Dividends are Safe

2012

2011

2010

Revenue

$6,623

$6,466

$5,932

Operating Income

$1,878

$1,892

$1,725

Net Income

$1,099

$1,116

$1,029

Earnings Per Share

$2.81

$2.66

$2.26

Morningstar.com [Revenue and Income in millions]

The company has been showing a strong income statement over the past three years. It has been able to expand revenue on a year over year basis. In the past three years, on average, its revenue growth stood at 8.2% while the industry average was at -1.9%. The company has an operating margin of 16.6%. In addition, it has shown exceptional EPS growth of 13.5% in the past three years.

2012

2011

2010

Cash From Operations

$1,170

$1,183

$1,091

Capital Expenditures

-$74

-$56

-$40

Free Cash Flow

$1,096

$1,127

$1,051

Morningstar.com [Figures in millions]

Over the years, the company has shown strong cash flows. Over the past years, it has been consistently generating strong operating and free cash flows. Its free cash flows adequately cover divided payments. At the end of 2012, its free cash flow stood at $1,096 million while dividend payment accounted for $807 million.

The company's financial health also seems to be in a strong position to continue to increase returns for investors. Below are a few metrics showing the company's strong financial health.

  • Current Ratio 1.73
  • Quick Ratio 1.13

Reynolds American Inc, (NYSE:RAI) through its subsidiaries, manufactures cigarettes and other tobacco products in the United States. At present, Reynolds American offers a quarterly dividend of $0.59 cents per share. For the full year of 2012, it provided a dividend of $2.33. Over the past five years, it has been consistently able to increase its dividend by 38.82%.

How Dividends are Safe

2012

2011

2010

Revenue

$8,304

$8,541

$8,551

Operating Income

$2,214

$2,399

$2,419

Net Income

$1,272

$1,406

$1,113

Earnings Per Share

$2.24

$2.40

$1.90

Morningstar.com [Revenue and Income in millions]

The company has been showing a strong financial performance over the past three years. It has been able to generate strong revenue and earnings. However, in the past three years, on average, its revenue growth remained quite stagnant and stood at a negative 0.5% when the industry average was at -1.9%. However, the company has a high operating margin of 26.7%, and in the past three years, its EPS growth stood at 10.7%.

On the other hand, the company has shown strong cash flows. Over the past years, it has been consistently increasing operating and free cash flows. Its free cash flows adequately cover its dividend payments. At the end of 2012, its free cash flow stood at $1,091 million while dividend payment accounted for $1,307 million. The company's financial health also seems to be in a strong position to continue to increase returns for investors.

  • Current Ratio 1.28
  • Quick Ratio 0.72
  • Debt/Equity 0.96

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: Efsinvestment is a team of analysts. This article was written by Siraj Sarwar, one of our equity analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.

Source: 4 Tobacco Giants' Financials Reviewed