The tobacco industry has many positive qualities that make it an abundant source of high-quality dividend stocks. Tobacco stocks typically have high dividend yields, and are also excellent picks for dividend growth. Due to the incredibly stable business model of tobacco manufacturing, many tobacco companies have rewarded their shareholders with rising dividends for several decades.
The past year has been difficult for tobacco stocks. With share prices falling throughout, dividend yields are rising to unusually high levels across the tobacco industry. This has created unique buying opportunities for income investors looking for high dividend yields.
Philip Morris International (PM)
Philip Morris International is the world’s largest publicly-traded tobacco stock, with a market capitalization of $130 billion. It operates the Marlboro brand, which represents approximately 35% of the company’s cigarette shipment volumes. It also has a group of other brands including Parliament, L&M, Lark, Merit, Muratti, and Chesterfield. In all, Philip Morris International has six of the top 15 international brands and sells its products in more than 180 countries outside the United States.
Philip Morris reported its most recent quarterly results on October 18. Revenue of $7.5 billion increased by 3.3% on a constant-currency basis. Adjusted earnings-per-share of $1.44 increased 21% from the same quarter a year ago.
Philip Morris is rolling out its next-generation product portfolio, which it refers to as reduced-risk products. It is making major progress in this area. Sales of its reduced-risk portfolio reached $3.6 billion in 2017. It has already rolled out IQOS in certain international regions, with good results thus far.
Source: Morgan Stanley Global Consumer & Retail Conference, page 5
The IQOS product has already claimed the number two market share position in Japan. Philip Morris expects to continue releasing the product line in new markets. The company plans to bring IQOS to India, the second-largest smoking market behind China, in the near future. By 2025, the company expects its reduced-risk product line could generate $17 billion to $19 billion in sales each year.
This growth will help the company continue to reward shareholders with rising dividends. Philip Morris International has increased its dividend for 11 years in a row, including a 6.5% increase in 2018. Philip Morris International is a Dividend Achiever, a group of stocks with 10+ consecutive years of dividend increases. In all, Philip Morris has increased its dividend by 148%, or a compound annual growth rate of 9.5%, since it became a public company in 2008.
Altria Group (MO)
Altria is the second-largest tobacco stock, with a market capitalization of $100 billion. Altria operates the Marlboro cigarette brands in the United States, as well as a broad product portfolio that includes chewing tobacco and wine. Altria also owns a 10% investment in global beer giant Anheuser Busch Inbev.
In late October (10/25/18), Altria reported third-quarter revenue of $5.3 billion, an increase of 3.3% from the same quarter last year. Net revenue increased 1.0% in the core smokeable products segment, as price increases more than offset a decline in cigarette shipments. The combination of revenue growth, share buybacks, and a boost from tax reform fueled 20% earnings growth for Altria last quarter. Altria has generated higher profit margins and strong growth in the last five years.
Source: Annual Shareholder Meeting, page 6
Altria’s strong growth rate is due to its leading position in the U.S. tobacco industry. Altria has the most valuable cigarette brand in the United States and a broad portfolio of category-leading brands. Marlboro enjoys tremendous brand loyalty in the United States, which means Altria can raise prices over time. The U.S. regulatory environment is also supportive of Altria’s dominance. Since tobacco companies are not allowed to advertise their products on television, Altria is virtually insulated against the threat of new competitors entering the cigarette market.
Going forward, Altria plans to continue growing sales with product innovation. Altria’s cigarette shipment volume has been in decline for an extended period, including a 5% decline last quarter. In response, Altria has invested heavily in new products. Altria is currently awaiting regulatory approval from the Food & Drug Administration for its new heated tobacco product line called IQOS. These heat-not-burn products will fuel Altria’s future growth.
Altria has an incredible dividend history. It has raised its dividend 53 times in the past 49 years. Its dividend growth rate has accelerated in the past year. Altria has declared two dividend increases in 2018, leading to a total dividend growth rate of over 20% for this year.
British American Tobacco plc (BTI)
British American Tobacco, or BTI, has a market capitalization of approximately $80 billion. BTI has a variety of cigarette brands, with five core global brands: Dunhill, Kent, Lucky Strike, Pall Mall, and Rothmans. It has a number of other brands outside its core portfolio, such as Benson & Hedges, Vogue, Viceroy, and more. Its major strategic initiative in recent years was the buyout of the remaining 48% stake in Reynolds American Tobacco that it did not already own, which took place in July 2017.
In late July (7/26/18) BTI reported financial results for the second quarter and first half of fiscal 2018. The results were boosted significantly by the Reynolds American acquisition, which propelled BTI to 11% volume growth and 57% revenue growth for the 2018 first half. Tobacco volumes declined by 2.2%, but price increases drove a 1.9% revenue increase, while margin expansion and share buybacks fueled 10% adjusted earnings growth in the first half.
BTI estimated the overall cigarette industry experienced a 3%-4% volume decline over the first half of 2018. In response, BTI is investing in new products. BTI has a line of “reduced-risk” products, such as e-cigarettes, vapor, and heated tobacco products including its Vuse, glo, and Vype brands. BTI expects full-year sales of $1.2 billion from new products like vaping pens and other tobacco heating devices in 2018. Consumer adoption has been slower than expected this year, but alternative products to traditional cigarettes still represent BTI’s biggest growth catalyst.
BTI’s growth potential is a result of its product innovation and competitive advantages. The company has invested over $2.5 billion in new product development since 2012. This investment will help the company retain its competitive position within the tobacco industry. BTI has a compelling dividend. The company set 2018 dividends of 195.2 pence per share. This results in a payout of approximately $2.53 per share in U.S. dollars, for a dividend yield of 5.8%.
These Tobacco Stocks Keep The Dividends Rolling
Investors interested in growing their dividend income should consider investing in tobacco stocks. The top tobacco stocks have strong brands and generate lots of cash flow, which they use in part to pay dividends to shareholders. Each of the stocks on this list has a dividend yield of 5% or higher, and the likelihood of increased dividends going forward.