Three Tobacco Stocks Offering Superb Dividends

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

The tobacco industry has been an attractive area for income-seekers. Many renowned investors make high and safe returns in the tobacco business. Investing in this industry may not be well-liked by all investors, but tobacco companies are offering some of the highest dividends around. While it is widely considered to be a “sin” industry, there are people getting the most out of this business. Thanks to its massive market size and endless cash flow, companies are able to hand out regular dividend payments. We can consider tobacco stocks as recession-resistant because smoking feeds a basic need for smokers, which results in enormous piles of cash hovering in the industry. That’s why these companies were able to do well in times of economic slowdowns.

In this article, I pick three tobacco giants with enormous dividends. All of these companies are large-cap and offer a dividend yield above 5%. Moreover, they are estimated to deliver a minimum 6.8% EPS growth annually over the next five years. I have examined these stocks in this article, and added my opinion along with my analysis. Here is a fundamental analysis of these three tobacco stocks offering superb dividends.

Key Indices

 

Reynolds American International

Lorillard, Inc

Altria Group

P/E

17.8

14.1

17.8

P/S

3.1

2.4

4.0

P/B

4.3

-9.8

17.9

Operating Margin

29.6 (%)

28.8 (%)

39.4 (%)

Net Margin

17.3 (%)

16.8 (%)

22.5 (%)

Dividend Yield

5.24 (%)

5.23 (%)

5.00 (%)

Source: Morningstar.com

Reynolds American International (NYSE: RAI)

As one of the largest companies in the industry, Reynolds American manages roughly 28 percent of the domestic cigarette market. Currently the corporation pays a yearly dividend of $2.36 per share, yielding 5.24 percent. Since 2008 the company increased dividends by 39%. Moreover, the company's stock grew by nearly 38% over the last year.

The corporation has fairly secure levels of revenues. During the previous four years, the company had stable revenues of around $8.5 billion. The company's revenue growth rate remained relatively stagnant in the previous four years. However, the company has been able to improve margins in the past 3 years. Since 2004, the company decreased head-count by 35%.

Over the previous two years, cash flows from operations have expanded at an average of 8.6 percent. It produced $1.3 billion in free cash flows, and paid out $1.2 billion in dividends over the previous twelve months. Moreover, the company managed to reduce debt by 44% to $2.5 billion. This led the company to pay lower interest expenses by 31% to $56 million.

The company's dividend payout ratio improved over the last 5 years. Currently its payout ratio stands at 90% of earnings. I believe future dividend growth for the company will most probably connect to the earnings growth. The company is also buying back its outstanding shares. At the end of 2012, the company bought nearly 15 million of outstanding shares.

Lorillard (NYSE: LO)

Lorillard's principal products are marketed under the brand names of Newport, Kent, True, Maverick, and Old Gold. Lorillard is the 3rd largest manufacturer of cigarettes in the U.S.  The company pays a yearly dividend of $6.20 per share, yielding at 5.23 percent. Since 2008, the company has increased dividends by 15% and raised earnings per share by 65%. The company anticipates EPS growth of 8.6% in 2013.

Moreover, Lorillard has displayed impressive revenue growth over the previous three years. In the past three years the company has increased revenues at an annual rate of 15.6%. For the current year, the company is looking to grow revenue at a rate of 4.6%. However, the company was not able to turn increased revenues into profits. The company's gross margin contracted over the previous few years.

Still, Lorillard has hefty cash flows. In the trailing twelve months the corporation produced $1.13 billion in cash flows from operations, and $1 billion in free cash flows. At the same time, the corporation paid $781 million in dividends. Similar to its peers, the company is aggressively buying back its outstanding shares.

Altria Group (NYSE: MO)

Besides traditional tobacco products, Altria offers pipe tobacco and machine-made large cigars. Altria also maintains a portfolio of leveraged and direct finance leases. Recently, Altria raised dividends by 3 cents to 44 cents per share, and it currently offers a dividend yield of 5%. Moreover, the company has a low beta of only 0.4. It is an attractive investment for income hunters thanks to a combination of a low beta and high yield.

Altria is growing revenue at a constant rate over the previous three years. In the ttm, the company's revenue stands at $17.86 billion. Moreover, the company has a whopping gross margin of 38%, and an operating margin of 25%. The company expanded EPS at a rate of 7.7% over the previous 3 years. The company expects to increase EPS by 7% in the following year.

Altria has massive cash flows at present. The company generated $3.16 billion in operating cash flows, and its CAPEX decreased significantly over the previous 5 years. Since 2008, Altria decreased capital expenditure from $241 million to $107 million. Altria's free cash flows stand at 3 billion. In addition, the company has a payout of 87%.

Altria offers attractive dividends at a substantial yield. The company has stable financial situation and a pretty safe business environment from macro head winds. The company is trading at attractive multiples with low price-to-sales ratio of 2.08. It has been one of the safest places to put money to shield against macro-economic conditions.


BargainReporter owns shares of Altria Group. 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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