Light Up with This Stock
Cecil is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Tobacco generally tends to become habit for most people who try it, but it is a fairly safe industry. The companies in the tobacco sector were able to do well even in times of economic slowdown. However, more recently, strict regulations have hampered sales and restricted growth in the industry. It should be kept in mind that the tobacco industry is in its mature stage, and any growth is likely to be marginal. Nevertheless, the participants have incredibly strong market position and continue to pay their investors handsomely.
Philip Morris (NYSE: PM) is one such company that has been paying investors well over the years. The company pays a fairly handsome dividend and also buys back stock. As a result of this, investors get a steady stream of income and their shares become more valuable as the number of shares outstanding reduces. The buyback also provides some sort of floor to the stock and helps maintain its value. Back in September, Philip Morris raised its dividend from $0.77 to $0.85 per quarter. With that new dividend, the company pays investors $3.40 per share each year. As of Nov. 21, according to ycharts, the stock had a dividend yield of 3.90%.
Dividend payouts are pretty high for most companies in this sector. Reynolds American (NYSE: RAI) controls roughly 28% of the U.S. cigarette market and is the second-largest domestic cigarette manufacturer behind Altria. Its brands include Camel, Kool, and Pall Mall. At the moment, the company pays an annual dividend of $2.36 per share, yielding 5.54%. Lorillard (NYSE: LO) is the third-largest manufacturer of cigarettes in the United States. Its flagship brand, Newport, claims a 14% share of the total U.S. cigarette market, and a 36% share of the menthol category. Lorillard pays an annual dividend of $6.20 per share, yielding 5.10%.
The key that sets Reynolds American apart from the other two is the fact that revenue growth has been pretty stagnant for that company. During the past four years, RAI has reported revenues around $8.50 billion. In the past twelve months, it has been able to generate $8.3 billion in sales, again indicating slow growth. Philip Morris in particular has seen outstanding growth in revenues. Philip Morris' revenues have increased by more than 38% in the previous five years. This represents an exceptional growth in revenues for a company operating in a mature and stable industry. Lorillard has also seen incredible revenue growth in the recent past. Revenues have risen at an average of 15.6% over the past three years. In the past twelve months, the company recorded revenues of $6.50 billion and operating income of $1.88 billion.
Another reason to keep an eye on Philip Morris is the fact that the company has been able to generate an operating margin of about 15%-16% over the past five years. The increase in revenue is reflected in the increase in the EPS since 2007 levels. Philip Morris' earnings per share have experienced a massive increase of 69.5% in the previous five years. For the most recent quarter, the company reported earnings of $1.38 per share and year-over-year growth of 8.1%
The company has incredibly strong cash flows and has been able to increase them every year over the past five years. At the end of 2011, the company generated $10.5 billion in cash flows from operations and $9.6 billion in free cash flows. Moreover, for the trailing twelve months, the company generated $8.73 billion in operating cash flows and $7.6 billion in free cash flows. Philip Morris has pegged its revenue growth forecast at 6.2%. Compare that with Lorillard, which is expected to be at 3.4%, and Reynolds which, is expecting a revenue decline of 2.7%. At around $88, now the price has gone up a little too much to be considered excellent value, the steady stream of dividend income is one of the key reasons why investing in Philip Morris would be a good idea.
ceciljohn2002 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!