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Summary

  • High dividend yield averaging 4.9%.
  • All stocks in analysis increased dividends every year since 2010.
  • Regulation and negative press add risk to these stocks.

This article will be the 5th of a six-part dividend analysis aimed at identifying the top dividend stock in each of the following sectors:

1. Big Oil

2. Utility Companies

3. Technology

4. Consumer Staples

5. Big Tobacco

6. Dividend Cornerstones

It's understandable that some investors may avoid the big tobacco industry for personal reasons, but many of these companies offer very attractive dividends that can benefit any portfolio. Today tobacco companies have become common in dividend income portfolios for their high dividend yields and steady dividend payments. In this analysis I'll include Philip Morris (NYSE:PM), Altria (NYSE:MO), Lorillard (NYSE:LO) and Reynolds American (NYSE:RAI). It's important to note that Reynolds is currently pursuing the acquisition of Lorillard. While I won't go into depth on this potential acquisition, investors can read more here.

Market Value

P/E

Fwd. P/E

Dividend Yield

Beta

Philip Morris

$ 127.6

15.2

14.4

4.7%

0.94

Altria

$ 72.4

16.1

13.2

5.3%

0.42

Lorillard

$ 18.9

16.6

13.6

4.7%

0.33

Reynolds

$ 28.9

17.1

14.7

4.9%

0.25

Source: Yahoo Financials

Beta

Beta is the measure of volatility (or systematic risk) of a stock in comparison to the market as a whole. A beta of 1 means the stock price will move in line with the market. A beta of less than 1 means the stock is less volatile than the market and a beta above 1 generally means the stock price is more volatile than the market. Generally, dividend investors want a stock with a low beta so they are more protected from market downturns. With the exception of Philip Morris, all the stocks in this analysis have very low betas and therefore minimal price fluctuations.

Dividends

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As I've stated in my previous dividend analysis articles, steadily rising dividend payments are the most essential metric to consider when adding a stock to your dividend portfolio. A company with a high dividend yield may not necessarily mean they will have a high dividend yield in the future. But a company with a long track record of increasing dividend payments on a consistent basis gives investors confidence in the company's performance and ability to sustain their dividend. In this analysis, all four companies have increased dividends every year since 2010.

Dividend Yield

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The tobacco industry has an impressive dividend yield and as a group the stocks in this analysis have a dividend yield average of 4.9%. With the exception of Philip Morris, these stocks rarely dip below 4.0% and Altria and Reynolds rarely dip below 5%. This is an outstanding return when comparing across industries. In my five articles covering dividend stocks, big tobacco had the highest dividend yield with utilities coming in second with an average dividend yield of 4.37%.

Payout Ratio

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As with consumer staple stocks, tobacco stocks don't have to invest heavily into R&D or capital expenditures as tech and oil stocks have to do. These companies use dividends as the main way to return value to shareholders. As a result, the payout ratios are relatively high in this sector. Lorillard and Philip Morris are the standouts with their payout ratio rarely exceeding 70%.

Conclusion

Tobacco companies have an established track record of profitability and dividend payments. While smoking continues to gain bad press and faces increasing government regulation, the big tobacco companies still bring in billions of dollars every year. One area of growth just seen in the last few years has been e-cigarettes, which are viewed as a safe and healthier alternative to ordinary cigarettes. However, government regulation will likely soon be increased on e-cigs, which have enjoyed a brief run of being largely unregulated. Advertising restrictions, flavoring rules and specialized taxes will likely soon be implemented on e-cigs as they gain popularity among younger users.

All the stocks in this analysis would be good additions to any dividend portfolio, but Altria and Lorillard are my top picks. Altria is a large company with a market cap of $72 billion and has the highest current dividend yield of 5.3%. Since its spin-off from Philip Morris in 2008, it has increased dividends every year. Altria also owns a 28% stake in one of the largest brewing companies in the world, SABMiller. This further diversifies the company and increases its attractiveness.

Lorillard is a much riskier pick with the FDA considering imposing tougher restrictions on Lorillard's core business, menthol cigarettes. However, Lorillard is the leader in e-cigs with Blu cigs growing tremendously fast and gaining a roughly 47% market share. As of December 31, 2013 e-cigs had annual sales of $230 million, up from $61 million in 2012. Lorillard also has a low beta, consistent dividend and high dividend yield. A potential buyout by Reynolds could also result in capital appreciation for stock holders waiting on their dividend payment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Big Tobacco Dividend Analysis