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Lorillard Inc. (LO), Philip Morris International Inc. (PM): Which Tobacco Company Offers the Best Returns?

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Tobacco companies are well known for their free cash flows, which allow them to return large amounts of cash to investors through stock repurchase programs and dividends. However, with each company providing equally impressive returns, which offers investors the most by way of cash returns?

Altria Group Inc (NYSE:MO) does not offer much in the way of stock repurchases but the company offers a dividend yield of around 5%. On the other hand, Philip Morris International Inc. (NYSE:PM) has been undertaking huge stock-repurchase programs but only offers a 4% dividend yield. Having said that, underdog Lorillard Inc. (NYSE:LO) could actually be achieving the best returns as the company rapidly reduces its small free-float by well-timed repurchase programs and a good 5% dividend yield. Lastly, Reynolds American, Inc. (NYSE:RAI), which offers a good 5% dividend yield and is currently in the middle of a two-and-a-half year $2.5 billion stock-repurchase program.

Lorillard Inc. (NYSE:LO)

So where can the best returns be found?

For this analysis, I am going to be examining the companies based on the total amount of cash returned to shareholders, per share, during the period. Then I’m going to use this per-share amount to arrive at a total returned as a percentage of the average share price for the period.

Philip Morris

Billions 2011 2012 Q1 2013 Average Return
Number of shares in issue (Billions) 1.76 1.69 1.65
Total dividend (Billions) $4.79 $5.40 $1.41
Total repurchases (Billions) $5.30 $6.52 $1.45
Returned per share $5.73 $7.05 $1.73
Average share price $65.00 $82.79 $90.00
Total returned 8.8% 8.5% 1.9% 8.3%

Figures in $

Well known for its huge stock buybacks, Philip Morris International Inc. (NYSE:PM) has been returning just under 8.3% a year to investors on a per-share basis. On a per-share basis, both stock repurchases and dividends meant that shareholders each received $5.73 per share in 2011 and $7.05 in 2012; based on the average share price for the year, this was a total cash return of 8.8% and 8.5%, respectively.

Altria

Billions 2011 2012 Q1 2013 Average Return
Number of shares in issue (Billions) 2.06 2.02 2
Total dividend (Billions) $3.22 $3.40 $0.87
Total repurchases (Billions) $1.32 $1.08 $0.09
Returned per share $2.20 $2.22 $0.48
Average share price $26.30 $31.60 $34.00
Total returned 8.4% 7.0% 1.4% 7%

Figures in $

Altria Group Inc (NYSE:MO) has not been buying back as much stock as Philip Morris International Inc. (NYSE:PM), but the company has still returned around 7% to investors annually. On a per-share basis, both stock repurchases and dividends meant that shareholders each received $2.20 per share in 2011 and $2.22 in 2012. Based on the average share price for the year, this was a total cash return of 8.4% and 7%, respectively.

Reynolds American

2011 2012 Q1 2013 Average Return
Number of shares in issue (Billions) 0.582 0.565 0.551
Total dividend (Billions) $1.20 $1.30 $0.33
Total repurchases (Billions) $0.28 $1.10 $0.33
Returned per share $2.55 $4.25 $1.18
Average share price $36.60 $41.10 $44.30
Total returned 7.0% 10.3% 2.7% 9.3%

Figures in $

Reynolds American, Inc. (NYSE:RAI) is much smaller than both Altria Group Inc (NYSE:MO) and Philip Morris International Inc. (NYSE:PM) but it would appear that the company’s well-placed mix of buybacks and a decent dividend payout have actually resulted in better returns for investors. The company has returned around 9.3% to investors annually (based on Q1 2013, the company is set to return an annualized 10.8% this year.) On a per-share basis, both stock repurchases and dividends meant that shareholders each received $2.55 per share in 2011 and $4.25 in 2012; based on the average share price for the year, this was a total cash return of 7% and 10.3% respectively.

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