Cigarette companies are among the top dividend payers in the consumer services industry. Many prominent investors garner safe and high returns from the tobacco business.
Although their products are subject to a tremendous amount of different types of taxes, these companies keep on making profits. (You can buy a pack of Marlboro for $1 in Ukraine, whereas the same pack costs $11 in New York City.)
Here, is a fundamental analysis of 6 tobacco companies that pay substantial dividends and sport a minimum market cap of $1 billion. I also estimated their fair value using the FED+ (Future Earnings Discounted + Equity) model. Data is derived from finviz:
British American Tobacco (BTI) is one of the largest cigarette makers around the world. The company is best known for its Dunhill, Kent, Lucky Strike and Viceroy Brands. The U.K.-based British American Tobacco was founded in 1902.
As of June 28th, the stock was trading at a P/E ratio of 18.66, and a forward P/E ratio of 19. The company offers a yield of 4.31%. Book value per share is $14.97, and analysts estimate an EPS growth of 9.3% for the next 5 years. Based on these estimates, my fair value estimate for British American Tobacco is $80. At a price of $86, the stock is slightly over-priced.
Lorillard (LO) is a very interesting company. After the courts ruled in favor of flavored cigarettes, the stock went berserk. In the following weeks, the stock retreated below $100, before bouncing back to the $110 level. It is surely not a stock for the faint hearted.
As of June 28th, the stock was trading at a P/E ratio of 15.93, and a forward P/E ratio of 13.14. Lorillard is one of the best dividend payers in the sector with a yield of 4.68%. Analysts estimate an EPS growth of 9.33% for the next 5 years. While I like the company’s yield and high-growth expectations, the company is subject to negative equity. Thus, I am not sure for how long Lorillard can keep paying dividends. My FED+ fair value estimate for Lorillard is $96, which is 13% lower than the June 28th price of $109.
Established in 1919, Virginia-based Altria Group (MO) is one of the oldest companies in the U.S. The company is best known for its Marlboro, Virginia Slims, and Parliament brands. Altria is also diversified into different business, maintaining a portfolio of leveraged and direct finance leases in transportation, as well as power generation and manufacturing equipment.
As of June 28th, the stock was trading at a P/E ratio of 13.87, and a forward P/E ratio of 12.28. The company is a nifty dividend payer with a yield of 5.68%. However, analysts have a relatively low EPS growth estimate of 6.48% for the next 5 years. Based on these values, my FED+ fair value estimate for Altria is $30. Thus, the stock is currently trading 15% below my fair value estimate.
Philip Morris (PM) is an international player in the cigarette business. While Altria does business primarily in the U.S.A, Philip Morris operates primarily in the European Union, Eastern Europe, Middle East, Africa, Asia, Canada and Latin America. Thanks to its gigantic market size, the company successfully competes with local companies throughout the globe.
As of June 28th, the stock was trading at a P/E ratio of 16.12, and a forward P/E ratio of 13. Its yield of 3.88% is not the best in the business, but its EPS growth estimate of 9.8% is one of the highest. The company is trading way above its book value of $2.19. Thus, expectations are quite high. My FED+ fair value estimate for Philip Morris is $60, which is slightly below the June 28th price of $65. However, I like Philip Morris and its exposure to emerging markets. That’s why I think it is a diversified dividend pick for the ultimate retirement portfolio.
North Carolina-based Reynolds American (RAI) was founded in 1875 in Winston-Salem. Its best known brands include Winston, Salem, Camel, and Pall Mall. Reynolds American also manages several licensed brands, including Dunhill and State Express 555.
As of June 28th, the stock was trading at a P/E ratio of 15.70, while the forward P/E ratio is expected to fall as low as 13. Reynolds American has a nifty dividend yield of 5.7%. However, similar to Altria, the 5-year annualized EPS growth estimate of 6.7% is lower than the industry average. Still, my FED+ fair value estimate for Reynolds American is $45. I think the stock is underpriced by 15%.
Vector Group Ltd (VGR) is another interesting stock to watch. Besides its tobacco business, the company engages in residential brokerage and real estate operations. The stock is highly volatile, sometimes going up and down unexpectedly on pretty high volume.
While Vector’s 8.8% dividend yield is the best in the industry, it is unlikely that the company can keep paying dividends at this rate. The balance sheet shows a negative equity of -$0.84 per share. The P/E ratio of 22.8 is also the highest among the group. Analysts estimate annualized EPS growth of 11% for the next 5 years. Based on these parameters, my FED+ fair value estimate for Vector Group is $10.27, which is much lower than the June 28th price of $17.63.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.