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%.
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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.