Many companies in arguably unattractive industries offer high dividend yields on top of solid and predictable cash flows. Investors will have a variety of opinions concerning what they will allow into their portfolio, and so here's a glance at some solid dividend payers in the tobacco and alcoholic beverage industries.
Phillip Morris International
Phillip Morris(PM) is one of the largest tobacco companies in the world, with nearly 80,000 employees, 60 factories, and a market capitalization of over $100 billion. The company spun off from Altria (MO) in 2008, and although the company is headquartered in New York, its revenues are derived from outside of the United States. Even with the large size, the company only has a bit over 15% of the the cigarette market outside of the US, so significant growth opportunities exist. Major brands of the company include Marlboro, L&M, Bond Street, Phillip Morris, and Lark, among others.
As of the most recent quarter, the company has a LT Debt/Equity ratio of 3, which is quite high. In 2009, the debt/equity ratio was 2.39; book value has been decreasing. The amount of goodwill on their balance sheet is double that of their shareholder's equity. Despite these balance sheet woes, their interest coverage ratio is over 12, which is quite acceptable.
- Dividend Yield: 4.48%
- Most Recent Dividend Increase: 10%
- Price to Earnings: 15.2
- Price to Free Cash Flow: 12.0
- LT Debt/Equity: 3.00
British American Tobacco
British American Tobacco, ADR (BTI), with a market capitalization of over $75 billion is one of the largest tobacco companies in the world. It sells its products in almost every country, and includes brands such as Lucky Strike.
With a LT Debt/Equity ratio of approximately 1, and a moderate interest coverage ratio, BTI's balance sheet isn't spectacular but is fairly decent compared to some others on this list. This, combined with their immense size and international exposure leads to the stock valuation being higher than the domestic US tobacco companies and therefore offers a reduced dividend yield in comparison.
- Dividend Yield: 4.27%
- Most Recent Dividend Increase: 15%
- Price to Earnings: 16.9
- Price to Free Cash Flow: 13.7
- LT Debt/Equity: 1.03
Altria
With a $50 billion market capitalization, Altria (MO) is among the industry-leaders in the US cigarette market. It has been a huge out-performer over the last several decades, because the valuation has stayed quite low while dividends and growth have allowed those who reinvest dividends to achieve excellent long-term returns. Constant threats of regulation and health-consciousness keep the valuation perpetually attractive but year after year, decade after decade, people keep buying their cigarettes.
The company offers an over-sized yield, but the balance sheet isn't great. It's also the only tobacco company on the list that generates an amount of free cash flow that is lower than net income, but the free cash flow is still a healthy and solid number.
- Dividend Yield: 6.22%
- Most Recent Dividend Increase: 8.5%
- Price to Earnings: 13.7
- Price to Free Cash Flow: 17.6
- LT Debt/Equity: 2.37
Reynolds American
Reynolds American (RAI) is the parent company of brands like Camel, Kool, and Pall Mall, and is the second largest US tobacco company. They also offer smokeless tobacco and other products. With a huge dividend yield backed by solid cash flow, the company can be appealing to those seeking to boost their average portfolio yield.
Growth for the company has been slow, and even negative, over the last few years. One would wonder why, despite having worse growth and lower margins, and a comparable dividend yield, the company would trade at approximately the same valuation as Altria. The answer may be that their balance sheet is cleaner than Altria's with a lower LT debt/equity ratio and a higher interest coverage ratio. Goodwill does exceed equity, however, so the balance sheet is not what I would call "strong" by any stretch. It is a bit of a standout among an industry of worse balance sheets.
- Dividend Yield: 6.09%
- Most Recent Dividend Increase: 9%
- Price to Earnings: 15.2
- Price to Free Cash Flow: 13.4
- LT Debt/Equity: 0.56
Lorillard
Founded back in the 1700's, Lorillard's (LO) major cigarette brand is Newport, a menthol brand. It's growth rate is substantially higher than some of the other companies on this list, as revenue was approximately $3.5 billion in 2005 and is approximately $5.8 billion in the trailing twelve month period. The combination of the large dividend yield and the substantial recent dividend growth is very respectable.
The growth has come at a price. Lorillard's shareholder equity is negative. The interest coverage ratio, however, is surprisingly healthy and high at over 15. A current threat to the company is the possibility of a ban on menthol cigarettes, which is keeping the valuation very low and the risks high. Critics assert that menthol cigarettes, since they have a minty flavor, attract young smokers and new smokers.
- Dividend Yield: 6.06%
- Most Recent Dividend Increase: 12.5%
- Price to Earnings: 11.3
- Price to Free Cash Flow: 10.2
- LT Debt/Equity: N/A
Diageo
Diageo (DEO) is a leading international producer of wines, spirits, and beer. The company behind well-known brands such as Smirnoff, Captain Morgan, Guinness, Johnnie Walker, and Baileys offers a substantial semiannual dividend. This extensive collection of world-class brands gives Diageo a strong economic moat and predictable growing cash flows. Many of their brands, including the above, are number 1 or 2 in their markets.
While I do think DEO would make a reasonable defensive dividend pick, I feel that the company is too expensive at the current price. The P/E is over 18, and the PEG ratio is over 2. With the dividends added, the picture becomes a bit more attractive, but with the company's high debt levels (LT Debt/Equity of over 2, and an interest coverage ratio of only 3), I don't find the current valuation to be wholly justified. The market is paying a premium for their large moat and their vast international exposure. Still, for those seeking to boost yield and still have dividend growth, Diageo might not be a bad defensive international pick.
- Dividend Yield: 3.00%
- Most Recent Dividend Increase: 5%
- Price to Earnings: 18.5
- Price to Free Cash Flow: 16.2
- LT Debt/Equity: 2.13
Molson Coors
Molson Coors (TAP), with its dividend yield of 2.3%, admittedly won't boost the yield of a reasonable dividend portfolio, but still boasts a yield higher than much of its industry competition. The company is one of the larger brewers around, and offers well-known brands like Coors Light, Molson, Carling, and Keystone. Molson Coors has a joint venture with SABMiller to sell products in the US and compete among the largest of brewers.
Unlike many of the others on this list, the company has a great balance sheet. A downside is that long-term growth is questionable. Volume of products sold has been declining a bit in North America and the UK. The company is streamlining their business and boosting their margin, but a good long-term investment should have fair revenue/volume growth prospects in order to offer sustainable growth. Their small amount of operations in countries other than Canada, US, and UK show promising growth, but at the current time these operations amount to a fairly small part of the company. The low valuation seems to take the questionable growth prospects into account, which in this case may lead to a nice value stock.
- Dividend Yield: 2.31%
- Most Recent Dividend Increase: 17%
- Price to Earnings: 11.7
- Price to Free Cash Flow: 11.9
- LT Debt/Equity: 0.19
Comparison Table
| Company | Div Yield | Div Increase | Price to Earnings | Price to Free Cash Flow | LT Debt/Equity |
|---|---|---|---|---|---|
| PM | 4.48% | 10% | 15.2 | 12.0 | 3.00 |
| BTI | 4.27% | 15% | 16.9 | 13.7 | 1.03 |
| MO | 6.22% | 8.5% | 13.7 | 17.6 | 2.37 |
| RAI | 6.09% | 9% | 15.2 | 13.4 | 0.56 |
| LO | 6.06% | 12.5% | 11.3 | 10.2 | N/A |
| DEO | 3.00% | 5% | 18.5 | 16.2 | 2.13 |
| TAP | 2.31% | 17% | 11.7 | 11.9 | 0.19 |
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
