Investors who seek high dividend yield tend to pick a tobacco company. Among the leading tobacco companies in the US, Altria Group Inc (NYSE:MO) gets the most attention on account of its high market cap. Putting the market cap aside, how is this tobacco company performing compared to other leading tobacco manufacturers? Is this company still worth owning?
During 2012 shares of Altria Group Inc (NYSE:MO) have only slightly risen. Other leading tobacco companies’ such as Lorillard Inc. (NYSE:LO) or Reynolds American, Inc. (NYSE:RAI) haven’t done any better in the last year. Since the beginning of 2013, however, all three companies’ shares have rallied along with the rest of the market: shares of Altria Group Inc (NYSE:MO) rose by 9.4% (year-to-date). In comparison, the S&P 500 index rose by slightly more than 10%, shares of Reynolds American, Inc. (NYSE:RAI) increased by 7.4%, and Lorillard Inc. (NYSE:LO)’s stock rose by only 3.8%. So how is Altria doing so far?
In terms of profit margins, Altria is in the middle of the pack with an operating profitably of little under 26%. In comparison, Philip Morris International Inc. (NYSE:PM) has a much lower margin of little under 18%. In 2012, the leader of the pack was Lorillard Inc. (NYSE:LO) with a profit margin of over 28%. The chart below shows the developments of the operating profitability of leading tobacco companies in the past several years.
These companies have maintained a steady and relatively high profit margin over the years. If they keep these margins high, investors are likely to keep getting the high dividend yields they’ve grown accustomed to.
Since the split between Altria Group Inc (NYSE:MO) and Philip Morris International back in 2008, Altria has kept raising its dividend payment every year. The current yearly dividend stands at $1.76 per share, which comes to an annual yield of a little over 5%. Moreover, the company maintains a high payout ratio that reached 83% in 2012. Other leading tobacco companies offer not only high dividend yields but also high payout ratios: Reynolds pays $2.36 per share per year, which comes to an annual yield of 5.3%, Philip Morris International Inc. (NYSE:PM) offers a yearly dividend of $3.40 per share, which is an annual yield of 3.7%, and Lorillard Inc. (NYSE:LO) pays $2.20 per share per year, which comes to a 5.45% yearly yield. This means, even in terms of dividend yield, Altria is in the middle of pack. As indicated in the table below, Altria is second to Reynolds in terms of payout ratio (as of 2012).
The two main reasons, in my opinion, to keep Altria over other tobacco companies are the company’s consistent high market share in the American tobacco industry, which is currently around 50%, and its rise in revenues.