Today, I would like to take a look at three tobacco stocks. This article will help to assess whether or not the companies are doing well, and it will look into recent developments and results to determine if the companies are good investments going forward. For the purposes of this article, I will not be discussing Philip Morris International (PM) since I would like to focus on tobacco stocks that have a dividend yield of 4.75% or more.
In an article that I wrote on December 16, 2012, I discussed whether or not the featured tobacco stocks' dividend yields were safe. This article will provide further details on the stocks and will analyze the new developments and news that has come out regarding them since.
The first stock we will look at, and the most intriguing one at this point in my opinion, is Lorillard, Inc. (LO). I find this stock the most intriguing for two reasons. For one, per Yahoo! Finance, the stock closed on April 29, 2013 at $42.95 per share. The 52 week high of the stock is $47.02 and the 52 week low is $36.70. The dividend yield currently sits at a healthy 5.10%. Out of the three stocks that will be discussed in this article, it is the only stock not trading near the 52 week high. This, in my opinion, provides a great entry point for the stock. Also, in its April 24, 2013 first quarter earnings release, Lorillard reported $57 million in sales from blu eCigs, and that represented a retail market share of over 40%.
The potential catalysts for Lorillard going forward are as follows. In the first quarter earnings release referenced above, management approved a new $500 million share repurchase program. This can serve as a great stock price catalyst, since it reduces the number of shares outstanding, and if total earnings stayed the same, it will increase earnings per share. It also can boost the stock price just from the buy orders from it. Also, blu eCigs is a rapidly growing market and with such a large market share, Lorillard's position as the first large tobacco company to enter the market could provide it with a substantial advantage in grabbing the growth of this niche. Altria (MO), has recently decided to enter the electronic cigarette market as well. This is a strong signal that this market is a good place to be, and it certainly looks like Lorillard made a great decision to acquire blu eCigs for $135 million on April 25, 2012.
At the time of that article on April 25, 2012, it indicated that the eCigs market provided about $250-$500 million in annual sales. With $57 million in sales just in the first quarter of 2013 for Lorillard from blu eCigs, and considering that Lorillard only has a 40%+ market share, that provides an indication that annual sales for all eCigs have grown to be more than the $250-$500 million from just a year ago. $57 million in quarterly sales would provide an annualized sales amount of $228 million. If Lorillard has a 40% market share, the market would have $570 million in annual sales.
A potential stumbling block for Lorillard could be the continued push by activists to ban menthol cigarettes. While I view the potential of this happening to be unlikely, it still represents a risk to Lorillard. since most of its sales are from its flagship Newport menthol brand. Mitigating factors for this risk, which I think the company has done well with, are twofold. One is the introduction of a non-menthol Newport cigarette in November of 2010. This introduction, and the entry into the eCig market, are two strong factors that I believe mitigate the risk of a ban on menthol cigarettes.
Altria is the next stock I would like to look at. As of April 29, 2013, at the market close, the stock has a price of $36.61. As a proud shareholder of Altria, I am thrilled to see the stock price increasing steadily over time as it has. The dividend yield currently sits at 4.90%.
Aside from Altria's strong dividend that has a history of being maintained and increased annually, the largest factor that I believe adds additional value to Altria's shares is its 28.7% interest in SABMiller. In this great article, a case is made as to why Altria should spin it off. This asset is valued at $23.84 billion according to that article. Altria has a current market cap of $73.49 billion.
Altria has spun off Philip Morris International to shareholders, as well as Kraft. Kraft has since split into Kraft Foods Group, Inc. (KRFT) and Mondelez International, Inc. (MDLZ). The company has a history of returning value to shareholders through these spin-offs, as both of those events have proven to be valuable to shareholders. Based on Altria's interest in SABMiller, regardless of whether or not it is eventually spun off, in addition to the fact that Altria has a strong history of solid earnings per share, Altria is the kind of stock that a dividend investor might want to conduct further research on.
The final stock I would like to look at today is Reynolds American Inc. (RAI). Per Yahoo! Finance, the stock reached a 52 week high on April 29, 2013 of $47.53 and closed the day at $47.50. As a shareholder, I am thrilled to see this 52 week high today. The current dividend yield is a strong 5%.
I would consider conducting further research on Reynolds American Inc. for the following reasons. In its most recent earnings release for the first quarter of 2013, adjusted earnings per share were .72 and that beat analyst expectations by 3 cents. Analysts expect the company to have a 5 year growth rate of 7.6% per annum. The June 7, 2012 dividend was raised to 59 cents from 56 cents in the previous quarter. A raise in the quarterly dividend effective next quarter is possible, and even if it is not raised, its solid earnings should provide a strong foundation to maintain its current dividend yield of 5%. The company has a strong portfolio of cigarettes including Camel, Pall Mall, Winston, and Kool, among others.
This concludes this article on three tobacco stocks that have great dividend yields. Please conduct your own research and due diligence before deciding whether or not to invest in any of these stocks.