Dividend Health in These Major Tobacco Stocks
Anthony is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
This article will take a look at three high-dividend-paying tobacco stocks that are some of the biggest tobacco companies in the world. It will look at how safe I believe their dividends to be. Additionally, I will make a case that these companies can not only safely maintain their dividends, but that they also are poised to continue raising them.
The three companies we will focus on today include Reynolds American (NYSE: RAI), Altria (NYSE: MO), and Lorillard (NYSE: LO). Year-to-date, Reynolds' share price is up 15.9%, Altria is up 11.1%, and Lorillard is up 11.9%.
Seeing as we are halfway through the year, it is difficult to say the prospects are good that the share prices will continue to climb in this manner all year. That being said, I feel the prospects are very strong that these companies will continue to raise their dividends, and that these companies offer compelling value for dividend investors because of this.
In an exciting development for tobacco companies, the U.S. Food and Drug Administration just approved two new Newport cigarettes for sale from Lorillard.
Lorillard's dividends are solid
According to Lorillard's press releases, the company targets a 70% to 75% payout ratio of earnings for dividends. As its dividends currently stand, it pays out $2.20 per year to shareholders. Earnings are forecast to come in at $3.12 per share this year, giving it a current-year payout ratio of 70.5%.
Next year, earnings for Lorillard are projected to be $3.42 per share. If the company maintains its payout ratio of 70.5%, that would work out to about $2.41 per share in dividends. That would be close to a 10% dividend increase next year. Its most recent dividend increase came in at about 6.5%, with the one before that being around 17%.
Lorillard, in the previous four quarters of earnings that were reported, has met expectations in the aggregate. It looks poised to deliver its earnings growth as it has shown no recent signs of lagging.
It has $2 billion of cash on its balance sheet as of the quarter ending in March 2013. Free cash flow was $692 million in that quarter as well. It is clear to me that generous future dividend increases are on the horizon for this company, barring any unforeseen negative circumstances.
Altria - expect dividend increases
Altria has a long history of steadily increasing its dividend. As it stands now, it has a current dividend yield of 5%. Its dividend payout ratio based on consensus estimates for earnings this year is 73.3%. The three tobacco companies highlighted here all like the payout ranges of 70% to 75% for dividends and so do I.
Next year, Altria is expected to earn $2.57 per share. If the payout ratio remains the same, that would work out to a dividend annually of about $1.88 per share. That could give us a dividend increase of around 6.8%. Its most recent dividend increase was 7.3%, and this is the type of steady increase I look for in a dividend stock.
Altria's cash on its balance sheet as of March has ballooned to $3.8 billion. Its free cash flow was about $1.8 billion in this quarter, with only $886 million going out in dividends afterward. The company is in a strong financial position based on this, and has additional cash to further strengthen this position.
Reynolds American - superb dividends
Reynolds American has a generous current dividend yield of 5.3%. It recently increased its dividend by 6.7%. Its current payout ratio is 78.5% of its earnings forecast for this fiscal year. This is the highest payout ratio of these three stocks mentioned.
Next year, the company is expected to grow its earnings to $3.40 per share. It has beaten earnings estimates in three of the past four quarters. Does management know something we don't hear? This begs the question of whether or not earnings forecasts are too low. If earnings estimates are on target, this company seems the least likely to be able to raise its dividends aggressively in the near future. This makes dividend increases of around 5% seem more likely in the short term based on its earnings. Perhaps it does have room to raise them more, especially if management is comfortable with a slightly higher payout ratio than Altria and Lorillard have.
The company has $2.8 billion of cash and generated $922 million of free cash flow in the quarter that ended in March 2013. It paid $326 million in dividends and bought back $325 million of stock in this quarter. This company is clearly in a strong financial position currently.
These companies all have strong financial positions and show nearly inevitable signs that dividends will be increased in the future.
How much dividends increase though, will be dependent on how good their earnings are. I feel that these companies offer unique opportunities to cash in on dividends with companies that are here to stay and that are dominant players in the market.
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!