Lorillard Inc. (LO), Altria Group Inc (MO), Reynolds American, Inc. (RAI): Three High Dividend Paying Stocks Worth Watching

One of the major benefits of owning a stock from a maturing industry is that they pay good dividends. There are many companies that provide a good dividend yield, but my preference is companies that have a significant share of the maturing industry and are innovative, either in marketing or in product offerings.

I have picked three such companies from the tobacco industry – Lorillard Inc. (NYSE:LO), Altria Group Inc (NYSE:MO), and Reynolds American, Inc. (NYSE:RAI) — which are known for providing a dividend yield of more than 5%.

Company 5-Year Annual Average Dividend Yield
Lorillard 5.4%
Altria 6.5%
Reynolds American 6.5%

Betting on e-cig

Lorillard Inc. (NYSE:LO) recently reported better than expected first-quarter results. It posted net sales of $1.58 billion, a growth of 3.3% year over year. Its operating profit was $438 million against analysts’ estimate of $418 million. The company witnessed higher profitability because of a favorable pricing environment. In the traditional cigarette division, its prices increased 2.9%.

Lorillard Inc. (NYSE:LO) also saw good response from the e-cigarette market. Its Blu e-cig generated retail sales of around $250 million. Lorillard is continuously expanding its geographic presence. Currently, this product is available in around 80,000 stores in limited stock-keeping units (SKUs). This provides an opportunity for further expansion into new markets in the form of adding more SKUs to the current stores. Considering this, the e-cig business looks on track to become a $1 billion business in 2013.

The company is also planning to launch a new rechargeable e-cig kit, which is expected to cost almost 50% less than traditional e-cig kits. This might dent profitability in the short run as the company will spend much in developing appeal for this product, but in the long run this will result in better sales.

Cashing with the retailers

Altria Group Inc (NYSE:MO)’s first-quarter results gave a clear picture of the cigarette industry, where volumes are declining but profitability is increasing because of the better pricing environment and lower promotional spending. The company experienced a cigarette volume decline of 5.2%; however, this weak volume was offset by better pricing, which resulted in first-quarter profit of $1.38 billion.

It reported an increase of 4.9% per pack in net cigarette pricing. One of the positive catalysts for investors is the increasing market share of Marlboro. It currently has 43.6% market share, up 1% from the fourth quarter.

Additionally, the company is testing its Marlboro Leadership Price Two (MLP 2) program in Michigan and South Carolina. Under this program, retailers will have to increase the price by $0.10 per pack from the standard rate, and they will get $0.15 per pack in promo support from the company. The current MLP program gives retailers promo support of $0.20, but under this new program, retailers will increase prices, making it beneficial for them as well.

This will also improve profitability for the company and will lead to better acceptance of the higher prices by consumers. This will provide a platform for the company to increase prices in future. The company is currently testing this program in select locations to gauge consumer reaction.

Milking the cash cows

Reynolds American, Inc. (NYSE:RAI) experienced the highest volume decline of 8.7% in its first quarter among the three companies discussed. However, it reported improved profitability because of a 4% increase in net pricing. Strong quarterly pricing since the fourth quarter of 2011 has resulted in increased profitability despite high promotional spending.

Its top two brands, Camel and Pall Mall, are increasing market share, which is a good sign for the company in the midst of slowing volumes. Its Camel brand’s market share is now 8.5%, up 0.1% year over year because its menthol version is gaining traction. Its Pall Mall brand has 9% market share, up 0.5% year over year due to better performance from the newly launched Pall Mall White and Pall Mall Black blends.

In the small but fast-growing e-cigarette market, sales of its Vuse brand will be expanded across many geographic locations this year. This provides a significant opportunity for the company, as it will have the advantage of launching its product in this category sooner than its largest competitor, Altria Group Inc (NYSE:MO).

I don’t think Reynolds American, Inc. (NYSE:RAI) will have any issue in providing dividends to investors in the long run, looking at share gain by top brands and opportunities in the e-cig market. I would recommend buying this stock for dividend seeking investors.

Harsh times, high profit

All these companies experienced declining cigarette volumes in the first quarter, but improved pricing should help these companies generate good profitability in future. Lorillard Inc. (NYSE:LO)’s should see an upside due to its growing Blu e-cig and its buyback program. Altria Group Inc (NYSE:MO)’s should experience an upside as well from its new MLP program, which will improve its profitability.

Reynolds American, Inc. (NYSE:RAI) has faced the largest decline in volume, but its top brands, Camel and Pall Mall, which contribute to more than 50% of sales, are gaining market share. Its Vuse brand is also expected to gain traction once the company starts a complete rollout in the U.S.

There is no obvious issue which would cause the companies to reduce their dividend yield, so, for dividend-seeking investors, all three of these stocks are worth a watch.

The article 3 High Dividend Paying Stocks Worth Watching originally appeared on Fool.com and is written by Madhu Dube.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

7 Most Expensive Cities in the World

5 Least Expensive Cities in the World

10 Celebrities Who Believe In Scientology

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

50 Crazy Facts About Japan You Won’t Believe

Top 10 Least Expensive Hybrid Cars to Save the Planet With

The 10 Biggest ‘Gate’ Controversies in History

The 10 States with the Highest Nursing Shortages Leaving Their Hospitals Depleted

The 10 Best Value Investment Blogs that Every Investor Must Read

The 6 Cheapest Boarding Schools in Europe 2015

The 5 Most Expensive Cars To Insure in the World

The 10 Most Common Genetically Modified Foods

10 Self-Made Billionaires Who Came From Nothing

The 10 Most Expensive Cities to Live in North America

The 13 Most Expensive Headphones in the World to Represent

The Top 20 Wealthiest Soccer Teams in 2014

4 BuzzWorthy Cannabis Stocks And Some Smoking Derivative Plays

The 10 Healthiest Fast Food Chains in America to Dine At

The 5 Most Expensive Cat Food Brands You Can Spoil Your Kitty With

The 6 Best eCommerce Platforms for Small Businesses

The 10 Worst Mistakes an Entrepreneur Can Make

The 5 Most OP Characters in League of Legends to Carry Games and Crush Foes With

The 5 Best Foods to Eat Before Running that Will Help You Pound the Pavement

10 Glaring Plot Holes in The Walking Dead that a Zombie-Filled Bus Could Drive Through

The 5 Biggest Celebrity Stoners Who Love Their Reefer

The 10 Most Overrated Movies Of All Time by Out-of-Touch Critics

Top 6 Least Expensive Cruise Destinations For 2015 that Will Take You to Paradise

10 States with Lowest Substance Abuse Rates in America

The 14 Most Watched TV Finales Ever

The 10 Best Selling Role Playing Games of All Time for PC

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

Top 6 Cities For The Ultra Rich to Live in Comfort

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

How to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!