Altria Is Still the Dividend King
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Sin stock investing, particularly in tobacco stocks, is an endeavor fraught with hurdles. Critics of the strategy frequently cite the social stigma of tobacco, as well as statistics showing the decline in smoking rates in the United States and the ire of the health-conscious consumer. While all true, don’t be fooled: Altria Group (NYSE: MO) isn’t going anywhere. The $67 billion company that has been paying and raising its profits and dividends for decades on end and will continue doing so for decades in the future.
An Unparalleled Success Story
Altria Group has a history that stretches back more than 180 years. Formerly the Philip Morris Companies, Altria slowly built a list of brands consisting of multiple products. Its tobacco offerings include the juggernaut Marlboro brand. Through its acquisition of UST Inc., Altria has smokeless tobacco products including the Skoal and Copenhagen brands. Altria also owns Ste. Michelle Wine Estates, John Middleton cigars, and a stake in brewing company SAB Miller.
Fellow tobacco companies Reynolds American (NYSE: RAI) and Lorillard (NYSE: LO) compete with Altria. Reynolds American’s brands include Camel, Pall Mall, and Kool. Reynolds American has a $23 billion market capitalization and a trailing price to earnings ratio of about 17. However, Reynolds American didn’t perform well through the first three quarters of 2012. Net revenues dropped more than 3.5%, and cigarette volumes for Camel and Pall Mall fell a combined 2.7% during the first nine months versus the same period in 2011.
Lorillard’s cigarette brands include Newport and Kent. Lorillard performed better than Reynolds American during the first three quarters of 2012, but not as well as Altria. Net revenues for Lorillard increased 1.4% and earnings per share increased better than 6%. Domestic unit volume for the company dropped almost 2%.
Although Reynolds American and Lorillard are profitable companies, they cannot offer the brand strength or financial strength of Altria. Philip Morris USA is the largest tobacco company in the U.S. and has about half of the U.S. cigarette market’s retail share. Over the first nine months of 2012, Altria’s net revenues increased 4% and earning per share jumped almost 23%.
Many investors are reluctant to invest in cigarettes to this degree because of the declining rates in smokers in the United States and suffocating regulations. I’m not scared, and you shouldn’t be either. Those arguments have been raised for decades, and so far they haven’t materialized. States that are already strapped for cash desperately need the excise tax revenue that Altria provides.
Altria is one of only three companies in the S&P 500 Index whose total shareholder return has exceeded the S&P 500's return every year for the last 12 years.
Since the spin-offs of Philip Morris International and Kraft in 2008, Altria has increased its dividend six times. The stock’s dividend has grown at a compound annual growth rate of more than 8% over the last four years. Altria’s management has targeted a payout ratio of roughly 85% of earnings going forward. Through a combination of increasing revenues and cost controls, it would be reasonable for investors to expect dividend growth in the range of the mid-to-high single digits. Considering Altria’s current yield of almost 5.5%, Altria will provide investors a compelling mix of a high current yield and solid dividend growth for many years to come.
Robert Ciura 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!