3 Top Tobacco Dividend Stocks

Anthony is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In searching for the best stocks that pay a good dividend while also having the ability to maintain earnings, I found three great tobacco stocks. They have great dividends going for them, and also have great catalysts that will enable them to continue their strong earnings.

The three companies that will be discussed here are Reynolds American (NYSE: RAI), Lorillard (NYSE: LO), and Altria (NYSE: MO).

What they have going for them

The following are the attributes that the three companies have going for them which make them great long-term investments in my opinion.

First, let's take a look at a five-year chart for price percentage change compared to the S&P 500.

<img alt="" src="http://media.ycharts.com/charts/10db8f1068ae4628d7ee34c5d72240a5.png" />

RAI data by YCharts

As this chart shows, all three companies have handily outperformed the S&P 500 index. This does not include their dividends, either, and the companies all pay dividends that amount to a 5% or greater dividend yield at the current time. Before the recent bull market around 2009-2010, the dividend yields were even higher.

Growing dividends at a high rate

The companies are growing dividends at a great rate. The industry I compare it to most is the telecom industry and companies such as AT&T and Verizon. I make this comparison because all of these companies are considered by many to be solid blue-chip companies in either the Dow Jones Industrials and/or the S&P 500.  Additionally, both industries have a history of generous dividends. With dividend increases for AT&T and Verizon of around 2% per year, these tobacco companies offer a substantial premium to that.

On May 9, Reynolds American announced a 6.8% annual dividend increase. This is in line with the recent 7% dividend increase for Altria and Lorillard's most recent dividend increase of around 6%.

Solid projected five-year growth

Reynolds American is estimated by analysts to grow by 7.6% per year over the next five years. Altria is poised to grow by 7.47% over this same time period, while Lorillard is expected to lead the pack with 9.65% growth in the same amount of time. This potential growth for Lorillard is fueled by its fast-growing electronic cigarette business.  

With growing dividends and projected earnings growth, it is no surprise that the companies' share prices are trading toward to upper end of their 52-week ranges collectively.

Additional bonuses with these companies

For Reynolds, owning shares in the company allows you to get in on a company with a strong portfolio of brands such as Camel, Pall Mall, Winston, and Kool, just to name a few. In the future, there is potential that any of these individual brands can be spun off to create further shareholder value.

As a fellow Fool pointed out in an article earlier this year, Altria has a 28.7% stake in SABMiller that it acquired as a result of selling Miller. This stake is performing very well, and Altria generates significant earnings as a result of it. With beer not being part of its core tobacco business, I believe that this could easily be spun off to existing shareholders. If that were to occur, shareholders could potentially reap rich rewards such as when Altria spun off Kraft and Philip Morris International. Since both of those spinoffs, each company has gone on to provide significant shareholder returns.

Lorillard has recently made efforts to diversify itself against total exposure to the menthol cigarette market. With potential bans on menthol being talked about, the company is smart to put itself in a position to be able to move on even if that were to occur. The company introduced a non-menthol brand of Newports last year and also acquired the electronic cigarette manufacturer Blu e-Cigs. This represents a significant growth opportunity for Lorillard as it is growing at a high rate and it is the brand with the largest market share in the electronic cigarette market. Lorillard has a 40% or so market share in this market, representing $57 million in sales in the first quarter of 2012 as noted in its earnings release. With the aggressive advertising of Blu, I expect this quarterly sales amount to increase over time. In the long run, I believe that this is a part of the company that has the potential to be spun off in the future.

Conclusion

I believe that these are great companies to add to a long term portfolio. I own shares in all three companies.

Based on the fact that they all pay a healthy dividend and that they have strong businesses, these are all very solid companies. They produce consistent profits that are expected to grow, and they all have exciting potential for the future with the possibility of additional shareholder value based on the brands and businesses that they are involved with.

Altria has been the best-performing stock of the past 50 years, but as the number of smokers in the U.S. continues to steadily decline, is Altria still a buy today? To find out whether everyone’s love-to-hate dividend stock is a savvy investment choice or a hazard to your portfolio, simply click here now for access to The Motley Fool's premium research report on the company.

 


Anthony Parsons owns shares of Altria Group, Lorillard, and Reynolds American. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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