In a previous dividend safety analysis we took a look at Philip Morris International (PM). Based on feedback from that article, several readers requested that a current dividend safety analysis be done for other tobacco companies as well, in particular, Altria Group Inc. (MO), Reynolds American Inc. (RAI), Lorillard Inc. (LO), and British American Tobacco PLC (BTI). Instead of doing these individually I thought it would be good to see them compared side-by-side in one analysis.
Altria Group owns three tobacco companies in the U.S. Philip Morris USA, U.S. Smokeless Tobacco Company and John Middleton are market leaders in the cigarette, smokeless tobacco and large machine-made cigar categories. Altria also owns Ste. Michelle Wine Estates and has an economic interest in SABMiller plc.
* Dividend history includes data before the spin-off of Philip Morris International
Reynolds American sells cigarette and other tobacco products in the U.S. Some of their notable brands include Camel, Pall Mall, Winston, Kool, Doral, Salem, Grizzly and Kodiak.
Lorillard manufactures and sells cigarettes and electronic cigarettes in the U.S. Some of their notable cigarette brands include Newport, Kent, True, Maverick, and Old Gold. Their electronic cigarettes are marketed under the blu eCigs brand name.
British American Tobacco is a British multinational tobacco company headquartered in London, UK. It is the world’s second-largest tobacco company by sales. BTI offers its products under such brands as Kent, Lucky Strike, Rothmans, Vogue, Viceroy, Benson & Hedges, Captain Black and Dunhill among others.
It's interesting to note that Altria is the lowest scoring (3) and highest yielding (5.1%) of the four stocks. Like most tobacco companies, Altria’s free cash flow payout ratio is on the higher side, but a current and five-year average ratio above 90% leaves little room for growth from that area. Looking closer we see that the FCF ratio increased dramatically after Philip Morris International was spun off. Altria does have an impressive profit margin consistency considering it sells a product that is taxed more every year and has more advertising restrictions imposed each year.
Reynolds is also around 90% for its FCF payout ratio, but it also has twice the current annual dividend payment in cash on hand. Reynolds has succeeded as well in keeping its profit margins steady and also has the lowest debt-to-total-capital of the four stocks.
Lorillard’s debt to total capital appears extremely high, but like Philip Morris International, this is due to having negative stockholders' equity. The negative equity is caused by Lorillard utilizing a favorable credit market to fund share buybacks, so this isn’t necessarily a negative. Lorillard also has twice the current annual dividend payment in cash on hand. One negative that should be investigated further for Lorillard is its declining profit margin over the past five years. Perhaps one reason for this is the additional money Lorillard has spent developing and marketing its blu eCig electronic cigarette product.
Finally, British American Tobacco scored the highest of the four with a 7. BTI has a low FCF payout ratio, a strong and increasing profit margin, and the highest rated bond of the group. BTI’s current cash on hand does not cover one annual dividend payment and its quick ratio is lower than we’d like to see, but overall the company’s current dividend appears to be very safe based on the above metrics.
The tobacco industry offers several options for income seeking investors. The above rating system is meant to help investors identify strengths of a company that reinforce the safety of its dividend, as well as point out potential issues that could threaten the health of the dividend.
Disclosure: The 4% Portfolio Retirement Service recommends PM.
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