This article will take a look at three high-dividend-paying tobacco stocks that are some of the biggest tobacco companies in the world. It will look at how safe I believe their dividends to be. Additionally, I will make a case that these companies can not only safely maintain their dividends, but that they also are poised to continue raising them.
The three companies we will focus on today include Reynolds American, Inc. (NYSE:RAI), Altria Group Inc (NYSE:MO), and Lorillard Inc. (NYSE:LO). Year-to-date, Reynolds’ share price is up 15.9%, Altria is up 11.1%, and Lorillard is up 11.9%.
Seeing as we are halfway through the year, it is difficult to say the prospects are good that the share prices will continue to climb in this manner all year. That being said, I feel the prospects are very strong that these companies will continue to raise their dividends, and that these companies offer compelling value for dividend investors because of this.
In an exciting development for tobacco companies, the U.S. Food and Drug Administration just approved two new Newport cigarettes for sale from Lorillard.
Lorillard’s dividends are solid
According to Lorillard Inc. (NYSE:LO)’s press releases, the company targets a 70% to 75% payout ratio of earnings for dividends. As its dividends currently stand, it pays out $2.20 per year to shareholders. Earnings are forecast to come in at $3.12 per share this year, giving it a current-year payout ratio of 70.5%.
Next year, earnings for Lorillard Inc. (NYSE:LO) are projected to be $3.42 per share. If the company maintains its payout ratio of 70.5%, that would work out to about $2.41 per share in dividends. That would be close to a 10% dividend increase next year. Its most recent dividend increase came in at about 6.5%, with the one before that being around 17%.
Lorillard Inc. (NYSE:LO), in the previous four quarters of earnings that were reported, has met expectations in the aggregate. It looks poised to deliver its earnings growth as it has shown no recent signs of lagging.
It has $2 billion of cash on its balance sheet as of the quarter ending in March 2013. Free cash flow was $692 million in that quarter as well. It is clear to me that generous future dividend increases are on the horizon for this company, barring any unforeseen negative circumstances.
Altria – expect dividend increases
Altria Group Inc (NYSE:MO) has a long history of steadily increasing its dividend. As it stands now, it has a current dividend yield of 5%. Its dividend payout ratio based on consensus estimates for earnings this year is 73.3%. The three tobacco companies highlighted here all like the payout ranges of 70% to 75% for dividends and so do I.
Next year, Altria Group Inc (NYSE:MO) is expected to earn $2.57 per share. If the payout ratio remains the same, that would work out to a dividend annually of about $1.88 per share. That could give us a dividend increase of around 6.8%. Its most recent dividend increase was 7.3%, and this is the type of steady increase I look for in a dividend stock.
Altria Group Inc (NYSE:MO)’s cash on its balance sheet as of March has ballooned to $3.8 billion. Its free cash flow was about $1.8 billion in this quarter, with only $886 million going out in dividends afterward. The company is in a strong financial position based on this, and has additional cash to further strengthen this position.