Turn a New Leaf With These Hot Tobacco Dividend Stocks

Tobacco stocks are known for their stable and predictable revenue, high profit margins, and reliable earnings. With their low capital expenditure needs, tobacco stocks also tend to generate significant free cash flow, which the companies then return to shareholders through high dividend payouts. This article will analyze three tobacco stocks that produce strong cash flow, even during recessions, which allows them to pay consistent dividends in any economy.

Something to Chew on: Altria Group

Altria (MO) is a consumer staples giant. It sells the Marlboro cigarette brand in the U.S. and a number of other non-smokeable brands, including Skoal, Copenhagen, and the Ste. Michelle brand of wine. Altria also has a 10% ownership stake in global beer giant Anheuser Busch InBev, in addition to large stakes in Juul, a vaping products manufacturer and distributor, as well as cannabis company Cronos Group (CRON) .

Altria’s business model is also highly resistant to recessions. Sales of cigarettes and other tobacco products hold up well when the economy declines. This explains why Altria’s earnings rose steadily throughout the Great Recession, and why earnings were unscathed during the brief 2020 recession 

Altria in late July reported second-quarter results, revealing adjusted diluted earnings per share increased 2.4% to $1.26 year-over-year. Net revenue stood at $6.5 billion, down by 5.7% year over year. Reported diluted earnings per share stood at $0.49, down by 57.8% year over year. Revenue decreased 4.1% to $5.37 billion year-over-year.

Meanwhile, Altria reported approximately $750 million remaining under the company’s existing $3.5 billion share repurchase program which is expected to complete by December 31, 2022. The company also reaffirmed full-year 2022 adjusted diluted earnings-per-share guidance of $4.79-$4.93 which represents an adjusted diluted earnings-per-share growth rate of 4% to 7%.

Altria ranks very highly in terms of safety because the company has tremendous competitive advantages. It operates in a highly regulated industry, which virtually eliminates the threat of new competition in the tobacco industry. Altria enjoys strong brands across its product portfolio, including the No. 1 cigarette brand. Altria has pricing power and brand loyalty.

In addition, tobacco companies enjoy low manufacturing and distribution costs, thanks to its economies of scale. This has fueled Altria’s tremendous dividend growth, enabling it to boast an impressive dividend growth streak of 52 years. The stock has a current yield of 8.3%.

A Hot Yield: Philip Morris International

Philip Morris International (PM) is a tobacco company that came into being when its parent company Altria spun off its international operations. Philip Morris sells cigarettes under the Marlboro brand, among others, internationally.

Philip Morris reported its second-quarter results in late July, showing net revenue of $7.83 billion, 3.1% higher compared to that same quarter in the prior year. Shipment volume was up 3.0% collectively on a pro forma basis (excluding PM’s operations in Ukraine and Russia), with cigarette shipment volume up 2.4% and heated tobacco, a much smaller portion of the business, up 7.4% year-over-year.

Adjusted earnings-per-share equaled $1.48, a currency-neutral increase of 3.8% vs. the comparable period last year. During the quarter, the company announced it had made an offer to buy the publicly traded Swedish Match AB for SEK 106 per share in cash. The company expects the acquisition to close by Q4 and start contributing to earnings in fiscal 2023. As a result of this acquisition, no shares were repurchased during the quarter, while the buyback program remains suspended.

Management revised its fiscal 2022 guidance, expecting adjusted earnings per share from $5.23 to $5.34 (previously $5.45 to $5.56). Excluding currency effects, management expects adjusted EPS to range from $6.09 to $6.20 (previously $6.98 to $6.09).

Philip Morris’ dividend payout ratio has never been especially low, and the ratio increased further during the last decade. At the peak, Philip Morris has paid out more than 90% of its net profits to its owners. Due to strong cash generation, low capital expenditure requirements and the stability of Philip Morris’ business model during recessions the dividend remains relatively well-covered. Shares currently yield 5.2%.

Can’t Brexit the Habit: British American Tobacco

British American Tobacco (BTI) is one of the world’s largest tobacco companies. British American Tobacco owns many tobacco brands, including Kool, Benson & Hedges, Dunhill, Kent, and Lucky Strike. The company also acquired the remaining 48% stake in Reynolds American Tobacco that it did not already own in July of 2017.

British American Tobacco announced its H1 pre-close trading update, which is its equivalent of its first quarter earnings announcement, on June 9. In the report, British American Tobacco stated that revenue growth performance was in line with expectations so far this year, driven, among other factors, by a strong performance of the non-combustible product portfolio. During the first three months of the year, those products reached around 20 million consumers. British American Tobacco stated that profitability in the New Categories group improved markedly compared to the previous year’s period, thanks to improving scale which allows for operating leverage.

For the current year, British American Tobacco is forecasting revenue growth of 2% to 4% at constant currencies, which is solid for a tobacco company. British American Tobacco generated adjusted earnings-per-share of 3.30 Pound Sterling in 2021, which equates to $4.45 at then-current interest rates. For 2022, analysts are currently predicting meaningfully higher profits, due to higher revenues, debt reduction, and a lower share count.

British American Tobacco has kept its dividend payout ratio in a range of 55%-75% throughout the last decade. Compared to other tobacco stocks, this is not a high payout ratio. Some competitors, such as Altria, pay out ~80% of their profits in the form of dividends. We believe that the dividend is safe for the foreseeable future. Shares currently yield over 7%.