One Dividend To Rule Them All
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Noted Wharton economist Jeremy Siegel noted in his book The Future for Investors that Altria Group (NYSE: MO), formerly Philip Morris, was the top performing stock from 1925 to 2003. Known as a sin stock, the owner of the Marlboro brand of cigarettes reliably pumped out profits (and importantly, dividends) to shareholders consistently over these many decades. As we enter 2013, the question to investors now is whether Altria is capable of the same kind of performance that made scores of investors rich from the wonderful benefits of long-term buy and hold investing.
A one-of-a-kind stock
Altria 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 Philip Morris USA, which holds the juggernaut Marlboro brand. Through its acquisition of UST, Altria has smokeless tobacco offerings including the Skoal and Copenhagen brands. Altria also owns Ste. Michelle Wine Estates, John Middleton cigars, and a stake in brewing company SAB Miller.
Close peer Reynolds American (NYSE: RAI) has a wide variety of cigarette brands including Camel, Pall Mall, Winston, and Kool. Reynolds American, like Altria, also offers smoke-free tobacco labels including Grizzly and Kodiac. Reynolds American holds popular brands, but unfortunately hasn’t performed very well in recent years. Revenue has declined for two years in a row, with full-year 2012 sales dropping almost 3%. Even worse, diluted earnings per share fell almost 7% in 2012 year-over-year. To the company’s credit, it raised its dividend in 2012 alongside its tobacco peers and currently yields 5.3%.
Fellow tobacco company Lorillard (NYSE: LO) is much smaller than Altria, with a market capitalization of $15 billion. The company provides the Newport and Kent brands, and in February reported decent, if unspectacular, full-year 2012 results. Revenue and diluted earnings per share increased 2.4% and 5.6%, respectively. To the company’s credit, Lorillard raised its dividend by more than 6% when it reported its results, and carries a higher yield than Altria of 5.7%.
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.
Furthermore, Altria’s full-year 2012 results were simply better than the results of its closest peers. Altria reported full-year revenue increased 3.5% and revealed impressive diluted earnings per share growth of 25% versus the prior year.
Prospects going forward
In February, Altria reaffirmed its 2013 earnings forecast, expected to fall within a range of $2.35 per share to $2.41 per share excluding one-time items. This represents an increase from $2.21 in 2012. That means that at recent prices, Altria is trading at a modest 15 times its trailing earnings, and 14 times the midpoint of its 2013 forecast.
Altria is quite simply one of best stocks to have owned over the past several decades. The company continues to reward shareholders with an ever-increasing stream of profits and dividend payments. Even tobacco skeptics who feel that the declining smoking rates in the United States will lead to Altria’s doom should be impressed that 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. Altria’s management has targeted a payout ratio of roughly 85% of earnings going forward, so based on even the lower end of the company’s 2013 earnings forecast, investors could conceivably receive an annualized dividend of $2 per share when the company next increases its shareholder payout. For new investors, that would provide a yield of 5.8% at recent prices.
Investors interested in consumer staples who aren’t averse to the stigma of sin stock investing would be wise to consider Altria. The company’s dividend isn’t quite as high as Lorillard’s, but it’s not advisable to chase a few basis points of yield. Altria is the dominant player in the U.S. tobacco market and holds a stronger brand than both Lorillard and Reynolds American and has exhibited better operating performance to boot. If reliable profits and a big and increasing dividend meet your investing criteria, you’d be wise to add Altria to your portfolio.
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!