By Mark Bern, CPA CFA
The tobacco industry isn’t a favorite of everyone but these companies do pay dividends that average about twice the average dividend of the S&P 500 and beat Treasury yields by a mile. I don’t own any of these stocks, but investors looking for consistently high, rising dividends may want to take a closer look.
The industry continues to face litigation, albeit at a much lower intensity than a few years back, and will likely continue to for the foreseeable future. However, the leaders of these companies are taking steps to offset volume losses in mature markets. The two most promising trends have been to focus on emerging markets and to spend more marketing budget on smokeless tobacco products.
The industry is also looking at other nicotine-related products. I don’t like the sound of that one, but I thought you should know what they’re up to. The emerging markets and smokeless tobacco products are moves away from regulation as neither has the scrutiny of cigarettes. The prospects are decent that these companies will be able to increase profits, cash flows and dividends well into the future.
Company | Symbol | Current Price | Dividend Yield | Payout | Net Profit Margin | Debt % of Capital | Est. Ave. Tot. Ret. |
Altria | $28.53 | 5.7% | 77% | 17.6% | 75% | 7.5% | |
British American | $94.03 | 4.1% | 59% | 24.9% | 48% | 11.0% | |
Lorillard | $109.09 | 4.7% | 62% | 17.3% | 73% | 15% | |
Philip Morris | $74.56 | 4.1% | 52% | 11.2% | 77% | 12% | |
Universal | $42.98 | 4.6% | 38% | 5.4% | 21% | 8% |
Altria has about a 49 percent share of the U.S. cigarette market. It is the parent company of Philip Morris and John Middleton. The company has adequate cash flow to fund operations and weather difficult market conditions. MO is investing in the growing smokeless tobacco business to help offset decreasing volumes of cigarette sales. Management is also focused on controlling costs. The board is likely to continue its commitment to raising dividends in the foreseeable future. With a yield of 5.7%, this stock may appeal to income investors.
British American owns a stake in Reynolds American through Brown & Williamson and is one of the largest tobacco companies in the world. The company’s primary operations are in Europe, Asia-Pacific, Latin America and Africa. BTI still has enough pricing power to keep both top and bottom lines increasing even as volumes continue to trend lower. Dividends have increased by an average of 19 percent per year over the past five years and appear poised to continue the trend at near that pace. The current yield of about 4.1% (I hope I calculated the currency conversion correctly) is on the low side of this group but the potential for the rate to grow along with earnings make this my number two selection of the group.
Lorillard is the third largest producer and distributor of cigarettes in the U.S. LO has been increasing market share at the expense of competitors and saw product shipments increasing in 2011 while overall volumes in the industry declined. The company also has an ongoing share repurchase program which will help bolster per share results. Lorillard seems to be interested in expanding into foreign markets. If it does, I suspect the company could increase sales and profit margins further. The higher dividend (4.7%), higher growth rate in earnings and better appreciation potential makes LO my best of breed for the industry.
Philip Morris International was spun off from Altria Group in 2008 in order to separate the company’s domestic and international operations into two independent companies. The company operates in Europe, the Middle East, Africa, Asia, Latin America and Canada. Price hikes and strong increased sales in Asia continue to help the company increase both the top and bottom lines. The board appears to remain committed to rising dividends and its share repurchase program. If the debt levels were better, PM would be on par with BTI. As it is, I like Lorillard and British American better.
Universal is the largest leaf tobacco exporter/importer in the world. The company is facing headwinds as of late, having lost two major customers and feeling pricing pressure from a worldwide supply glut. The margins are slim while debt is at a good level. The board remains committed to its policy of raising the dividend each year but increases may be lower in the future. The yield is good but there isn’t much appreciation potential as it primary customers, the cigarette companies, are looking for ways to cut costs and tobacco inventories look to remain high putting pressure on the company’s pricing options.
As always, investors are encouraged to use this list as a starting place. If a company highlighted here has some appeal, please dig into the company to satisfy yourself that this is an appropriate investment for your portfolio and investment goals.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
