Altria Group Inc (MO), Lorillard Inc. (LO): Tobacco Stocks with Upside and Yield

Tobacco stocks are typically high dividend payers and report consistent earnings trends. Currently, with investors shifting to more aggressive stances and bidding up shares of growth companies, high-yielding equities have been left behind. In fact, the majority of dividend stocks appear to be trading below their 50-day moving averages, lagging the moderate increase in the S&P 500 average over the second quarter.

Here are four of my favorites, starting with some key statistics:

Symbol	Company Name	Current Dividend Yield %	Price-to-Earnings (TTM)	Dividends Per Share	Current Price	Earnings Per Share	2013-07-01 CAPS Rating
MO	Altria (NYSE:MO) Group	5.0	16.4	1.76	35.38	2.16	5
BTI	British American Tobacco (NYSEMKT:BTI)	5.5	29.4	5.75	105.01	3.57	4
LO	Lorillard (NYSE:LO)	5.0	14.2	2.2	43.95	3.10	4
RAI	Reynolds American (NYSE:RAI)	5.2	18.1	2.52	48.8	2.70	4

A brief discussion of each might help decide on the best for your portfolio:

Philip Morris USA owner favorably priced

Shares of Altria Group Inc (NYSE:MO), the owner of Philip Morris USA, among several other subsidiaries earned $2.16 a share in the trailing 12 months. The stock is trading at just over 16x that figure. Last year, cigarette volumes were essentially flat, while smokeless tobacco and wine volumes each climbed nearly 4%. Share earnings are growing nicely, including a $0.10 year-over-year increase, to $0.69, in the March quarter. Catalysts were higher operating income across key segments, thanks largely to cost reductions, as well as increased equity income from its investment in SABMiller, and the absence of impairment and exit (cost containment) charges.

The company, receiving most of its earnings from Marlboros (smokeable products contributed 84% of 2012 revenue), distributes a dividend amounting to $1.76 a share, a 5.0% yield at the current price of just over $35. It is ranked 5 out of 5 by the CAPS Community (link).

The best yield among the four

British American Tobacco plc (LON:BATS) shares, trading on the New York Stock Exchange, as opposed to its London equivalent BATS.L, offers a sizable payout of $5.75 a share annually, about a 5.5% yield at its sunken price. The shares peaked at $115.21, before falling to the recent price of about $105.

This maker of Dunhill, Kent, Lucky Strike and other brands is a prime bounce-back candidate. Pricing power is helping to fuel revenue gains, while sales of smokeless products are also gaining ground. The low volatility shares (beta is 0.62) should be considered for their steady income. It is ranked 4 out of 5 by the CAPS Community.

A low valuation and improving earnings

Shares of Lorillard Inc. (NYSE:LO), with its most prominent brand being Newport, is priced at 14.2 times trailing 12 month earnings. The industry average P/E is 18.9, according to fool.com. The valuation is based on share net of $3.10, and results should increase further, possibly at a 10% year-to-year clip. Lorillard Inc. (NYSE:LO) is gaining share globally, specifically within the menthol category.

The dividend has increased consistently on an annual basis. The shares currently yield 5.0% annually. I recommend Lorillard Inc. (NYSE:LO) shares for their combination of price weakness and hefty yield.

A historically consistent dividend stock

Reynolds American, Inc. (NYSE:RAI), the second-largest cigarette manufacturer in the U.S., like the others discussed here, has regularly upped its dividend, while also repurchasing shares. Its annual dividend, now amounting to $2.52 a share, represents a yield of 5.2%. Its trailing 12-month earnings were $2.70, bringing its P/E ratio to 18.

Reynolds American, Inc. (NYSE:RAI)’s subsidiaries are R.J. Reynolds, American Snuff, and Santa Fe Natural. Reynolds American, Inc. (NYSE:RAI)’s Cameel and Pall Mall brands have maintained their market share for the most part. Its earnings are growing, partly thanks to expansion at its modestly-sized growth brand, Santa Fe.

Choosing your stock

In my view, Lorillard Inc. (NYSE:LO) shares are the most attractive of the four mentioned here, based on the company’s extensive use of cash for dividend payouts and repurchases. Cigarette makers often rely on international expansion and pricing for earnings growth. This sector is best-suited for income-hungry investors.

The article Tobacco Stocks with Upside and Yield originally appeared on Fool.com.

Damon Churchwell has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Damon is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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