Tobacco Provides Safety, Growth and Value Through 2013

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

Want to know where to find great value, high yield and safety throughout 2013? Look no further than cigarette stocks! Companies like Philip Morris International (NYSE: PM), Altria Group (NYSE: MO) and Reynolds American (NYSE: RAI) pay huge dividends to anyone who’s willing to own them; let’s take a look at why you should.

They’re Stable

They may nor beat the market every single year, but cigarette manufacturers are stable companies that continue a steady growth path while paying high dividends. When the market struggles, or remains stagnant, these companies continue on their path to slight gains over time. It may not seem extravagant, or even cool, but it works.

  S&P 500 PM MO RAI
1 Year 14.58% 8.85% 13.68% 3.56%
5 Year -1.03% 74.06% 38.78% 28.55%
10 Year 61.06% (Spin off 2008) 253.16% 717.82%

Just look at that table comparing the gains of these stocks to the S&P 500. As you can see, over a one year period, all three stocks were up, as was the S&P 500; none of them managed to beat the overall market though. If you look further out along the horizon, you’ll start to see that the consistent growth beats out the market over both the five and ten year period. Adding in all of those dividends will make the gains in tobacco look even bigger. 

Tobacco companies will continue to perform in a down market because people are hooked on their products and find it hard to leave, that’s what makes these companies great to own. 

Philip Morris International

Philip Morris International used to be the Altria arm responsible for international sales prior to a split that sent the two companies their separate ways. Now, Philip Morris International is a leading global distributor of cigarettes and other tobacco products. PM has over 15% of the international market under their wing and sales in over 200 countries around the world.

Philip Morris international is on the good side of analysts who believe the stock’s EPS will rise by a three year CAGR of 9.3%. They also predict that the company’s revenues will grow, as will their EBITDA. The peer group, some of which are being written about in this article, has consensus EBITDA growth estimates in the 5% range.

Altria

As mentioned, Altria used to be home to Philip Morris International. The company still owns Philip Morris and rights to the brand in the United States, as well as stakes in companies that are unrelated to tobacco such as SABMiller, the global brewing giant.

As well as being involved in the beer market, Altria also puts out its own brands of wine and a variety of smokeless products to capitalize on various markets.

Altria is seeing growth in all four of its major divisions with 4.2% growth in smoke products, 2.7% growth in smokeless brands, 16.7% growth in wine, and a huge 146% growth rate in the financial services division (YoY Q3).

With their cigarette brands Marlboro, Basic and Virginia Slims, Altria has a market share in the U.S. of around 46% with Reynolds American and Lorillard trailing behind.  

Reynolds American

Reynolds offers the largest dividend of the bunch but I feel that this company is slightly overvalued.

Like the previously discussed companies, Reynolds American manufactures and sells cigarettes and other tobacco products. Their products are sold in the United States, and a variety of well-known brands such as Camel, Doral and Winston make this company the second biggest tobacco company in the country with a 25% market share.

Analysts have 3-year revenue CAGR for Reynolds at -0.3%, less than the expected industry average of 1.5%. The company also falls short of the industry expected 13.8% EPS CAGR over the same time period with a 10.8% expected growth rate.

Reynolds, at least in my opinion, does not stand up to Altria or Philip Morris International, which are both very worthy investments.

Comparing

  PM MO RAI
P/E 17.1 16.9 17.1
Yield 4.1% 5.6% 5.7%
3-Yr EPS CAGR 9.3% 15.0% 10.8%
3-Yr Rev CAGR 3.9% 2.1% -0.3%
ROIC 38.9% 25.7% 17.5%

Final Verdict

Philip Morris International provides some great worldwide diversification into the sin stocks. The company pays a great, and very reliable, dividend.

Altria provides even further diversification, although it is all essentially within the United States. The company’s willingness to diversify into wine and brewing companies shows that they have the potential to maneuver if legislation in the U.S. goes against them.

Reynolds does have the bigger dividend of the bunch, but I don’t think the company’s prospects are as good as those that Altria and Philip Morris International will be seeing over the years to come. 

 


Ash1402 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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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