Companies that raise dividends show confidence in their financial performance for the foreseeable future. When management expects lackluster performance, they are more likely to freeze or even cut distributions. For example, back in 1998-1999 when the future of the tobacco companies was uncertain, the Board of Directors of Altria (MO) maintained the dividend payment for 7 consecutive quarters. But after they realized that the company would be able to survive, they kept raising dividends and were able to maintain the annual growth in distributions uninterrupted.
I have highlighted several “sin stocks”, which not only have strong competitive advantages, but have also managed to consistently raise distributions for many years in a row:
Altria Group, Inc. (MO), through its subsidiaries, engages in the manufacture and sale of cigarettes, wine, and other tobacco products in the United States and internationally. This dividend champion has increased dividends for 43 years in a row. The company is a dominant player in the US tobacco market, with a 50% market share in 2009. This mature market is in decline however, and as a result future growth in earnings per share could be difficult to materialize. They would likely come from efficiencies related to restructuring, such as the closure of its Cabarrus facility as well as the integration of smokeless tobacco company UST, which Altria acquired in 2008. Yield: 5.90% ( analysis)
Philip Morris International Inc. (PM) , through its subsidiaries, engages in the manufacture and sale of cigarettes and other tobacco products in markets outside of the United States. The company has consistently raised distributions since Altria (MO) spun it off in 2008. The number of smokers is decreasing in Western Europe, although the price increases have been able to offset any declines in revenues. In addition to that, growth in emerging markets for the brand products the company is producing should boost profitability in the long run. Strategic acquisitions should also add to the bottom line, as would synergies and strategic cost efficiencies are realized over time. Yield: 4% ( analysis)
Diageo plc (DEO) engages in producing, distilling, brewing, bottling, packaging, distributing, developing, and marketing spirits, beer, and wine products. The company’s premium spirits brands have been popular with US consumers who traded up to these premium brands. The North American market accounts for 34% of the company’s sales, while emerging markets account for 33% of its sales. Emerging markets have been a bright spot, as the company has been able to achieve strong double digit growth there. The company competes based on brand loyalty and offering quality products. It’s a typical consumer play where it tries to boost organic sales while also acquiring premium brands in order to further boost its competitiveness. Cost restructurings and efficiencies are another part of Diageo’s strategy for future earnings growth as well.Diageo has raised distributions for over one decade. Yield: 3.20% ( analysis)
Brown-Forman Corporation (BF.B) engages in the manufacture, bottling, import, export, and marketing of alcoholic beverages. Some of the company's top selling products include Jack Daniel’s Tennessee Whiskey and Finlandia. It is very intriguing how the company has been able to leverage the brand name of its top selling products by cutting costs to the bone and increasing efficiencies, while at the same time expanding sales internationally. This had translated into growth in earnings per share, which also fueled a 9.20% average annual growth in dividends over the past decade. This dividend aristocrat has raised distributions for 27 years in a row. Yield: 1.80% ( analysis)
Given the fact that so many Americans are obese these days, some might also say that companies such as soft-drinks manufacturer Coca Cola (KO) and fast-food restaurant chain McDonald’s (MCD) are sin stocks too.
The Coca-Cola Company (KO) manufactures, distributes, and markets nonalcoholic beverage concentrates and syrups worldwide. This dividend aristocrat has rewarded investors with higher dividends for 49 consecutive years. Coca-Cola has managed to increase annual distributions by 10% per year over the past decade. Yield: 2.90% ( analysis)
McDonald's Corporation (MCD), together with its subsidiaries, operates as a worldwide foodservice retailer. It franchises and operates McDonald's restaurants that offer various food items, soft drinks, coffee, and other beverages. This dividend aristocrat has rewarded investors with higher dividends for 34 consecutive years. McDonald's has managed to increase annual distributions by 26.50% per year over the past decade. Yield: 3.20% ( analysis)
Overall these sin stocks have done very well for their shareholders over the past. They have strong brand recognition, a product that consumers crave, and the pricing power to charge more each year and expand sales
Full Disclosure: Long all stocks mentioned above