Tobacco Stocks with Upside and Yield
Damon is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Tobacco stocks are typically high dividend payers and report consistent earnings trends. Currently, with investors shifting to more aggressive stances and bidding up shares of growth companies, high-yielding equities have been left behind. In fact, the majority of dividend stocks appear to be trading below their 50-day moving averages, lagging the moderate increase in the S&P 500 average over the second quarter.
Here are four of my favorites, starting with some key statistics:
A brief discussion of each might help decide on the best for your portfolio:
Philip Morris USA owner favorably priced
Shares of Altria (NYSE: MO), the owner of Philip Morris USA, among several other subsidiaries earned $2.16 a share in the trailing 12 months. The stock is trading at just over 16x that figure. Last year, cigarette volumes were essentially flat, while smokeless tobacco and wine volumes each climbed nearly 4%. Share earnings are growing nicely, including a $0.10 year-over-year increase, to $0.69, in the March quarter. Catalysts were higher operating income across key segments, thanks largely to cost reductions, as well as increased equity income from its investment in SABMiller, and the absence of impairment and exit (cost containment) charges.
The company, receiving most of its earnings from Marlboros (smokeable products contributed 84% of 2012 revenue), distributes a dividend amounting to $1.76 a share, a 5.0% yield at the current price of just over $35. It is ranked 5 out of 5 by the CAPS Community (link).
The best yield among the four
British American Tobacco (NYSEMKT: BTI) shares, trading on the New York Stock Exchange, as opposed to its London equivalent BATS.L, offers a sizable payout of $5.75 a share annually, about a 5.5% yield at its sunken price. The shares peaked at $115.21, before falling to the recent price of about $105.
This maker of Dunhill, Kent, Lucky Strike and other brands is a prime bounce-back candidate. Pricing power is helping to fuel revenue gains, while sales of smokeless products are also gaining ground. The low volatility shares (beta is 0.62) should be considered for their steady income. It is ranked 4 out of 5 by the CAPS Community.
A low valuation and improving earnings
Shares of Lorillard (NYSE: LO), with its most prominent brand being Newport, is priced at 14.2 times trailing 12 month earnings. The industry average P/E is 18.9, according to fool.com. The valuation is based on share net of $3.10, and results should increase further, possibly at a 10% year-to-year clip. Lorillard is gaining share globally, specifically within the menthol category.
The dividend has increased consistently on an annual basis. The shares currently yield 5.0% annually. I recommend Lorillard shares for their combination of price weakness and hefty yield.
A historically consistent dividend stock
Reynolds (NYSE: RAI), the second-largest cigarette manufacturer in the U.S., like the others discussed here, has regularly upped its dividend, while also repurchasing shares. Its annual dividend, now amounting to $2.52 a share, represents a yield of 5.2%. Its trailing 12-month earnings were $2.70, bringing its P/E ratio to 18.
Reynolds' subsidiaries are R.J. Reynolds, American Snuff, and Santa Fe Natural. Reynolds' Cameel and Pall Mall brands have maintained their market share for the most part. Its earnings are growing, partly thanks to expansion at its modestly-sized growth brand, Santa Fe.
Choosing your stock
In my view, Lorillard shares are the most attractive of the four mentioned here, based on the company's extensive use of cash for dividend payouts and repurchases. Cigarette makers often rely on international expansion and pricing for earnings growth. This sector is best-suited for income-hungry investors.
The Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.
Damon Churchwell has no position in any stocks mentioned. 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!