3 Benefits of Altria: High Yield, Growing Dividend and Low Volatility
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A recent headline from Bloomberg titled, "Cigarettes Are Safe as Long as You Just Invest..." pretty much covers why income investors like tobacco stocks such as Altria (NYSE: MO). However, investments should not be made based on financial website headlines. A closer look at the numbers behind the Altria dividend will help determine if this high-yield stock makes sense for your portfolio.
The tobacco industry is probably the most disliked industries in the U.S., the target of health concerns and lawsuits. On the flip side, the tobacco companies sell pleasurable and addictive products that a significant portion of the population purchases on a regular basis, allowing the companies to institute regular price increases with little fear of hurting sales. Both the government and legal professions need the tobacco companies to stay in business and profitable so the large amount of tobacco taxes keep flowing to the government coffers and the companies can continue to make the agreed lawsuit settlement payments.
Tobacco companies do not have to spend a lot on research and development, there are limits on the amount of advertising allowed and a large amount of retained cash would make a tobacco company target for more lawsuits. So the tobacco industry has become a good place for yield investors to find investment prospects.
Altria, formerly called Phillip Morris, is best known for its Marlboro brand of cigarettes. In the 1970s and 1980s the company diversified, buying Miller Brewing, Kraft and General Foods. In the new century Miller Brewing was merged into South African Brewing to become SABMiller, a separate publicly traded company. Phillip Morris changed its name to Altria in 2003. The food businesses were spun off, leaving just the tobacco businesses. In 2008, the company spun off 100 percent of its international tobacco businesses, which became Phillip Morris International (NYSE: PM). In 2009, Altria acquired tobacco and wine company U.S. Smokeless Tobacco Company.
The Altria dividend policy is to pay out approximately 80 percent of net income to investors in the form of dividends. Since the Phillip Morris International spinoff in 2008, the quarterly dividend has increased steadily from 29 cents per share to the current 41 cents, providing investors a 5.7 percent yield at the current share price. The dividend rate is usually increased each year with the payment of the September distribution. Altria earned an adjusted $2.05 per share in 2011, up 8% from the 2010 earnings. Management's earnings guidance for 2012 is an adjusted $2.17 to $2.23 per share, indicating the dividend will be increased by 6% to 9% later in the year.
Comparing the Altria dividend rate to the other major U.S. tobacco companies gives the following results:
- Altria: current yield 5.7%, most recent payout increase: 8%.
- Phillip Morris International: current yield: 4.0%, most recent payout increase: 20%.
- Reynolds American (NYSE: RAI): current yield: 5.6%, recent payout increase: 5.6%.
- Lorillard (NYSE: LO): current yield: 4.7%, recent payout increase: 15.5%.
All of the four major U.S. tobacco companies have a history of annual dividend increases. An interesting note: Investors who owned Altria before the Phillip Morris spinoff were earning a 75 cent quarterly dividend. The spinoff was one share of Phillip Morris for each share of Altria. Investors who retained the shares of both companies are now earnings a combined $1.18 quarterly, a 57% increase.
A recent article in Barron's took a critical look at recent share price gains for Altria and concluded the company might be in trouble due to a changing demographic of smokers and increased regulatory scrutiny. The article expressed the belief smokers would leave Altria's higher price Marlboro brands for less expensive cigarettes such as those offered by Lorillard. The Altria management responded to the article with a letter pointing out mistakes in the Barron's analysis and the company's expected growth prospects.
The Altria share price has appreciated by 20 percent over the last year, giving existing investors a very nice return including the dividend. Conservative investors looking to pick up shares now may want to wait for a price pullback or make a partial investment and be ready to commit more capital to the stock if the share value declines.
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