Altria Group Inc (MO), Lorillard Inc. (LO): Dividend Health in These Major Tobacco Stocks

Reynolds American – superb dividends

Reynolds American, Inc. (NYSE:RAI) has a generous current dividend yield of 5.3%. It recently increased its dividend by 6.7%. Its current payout ratio is 78.5% of its earnings forecast for this fiscal year. This is the highest payout ratio of these three stocks mentioned.

Next year, the company is expected to grow its earnings to $3.40 per share. It has beaten earnings estimates in three of the past four quarters. Does management know something we don’t hear? This begs the question of whether or not earnings forecasts are too low. If earnings estimates are on target, this company seems the least likely to be able to raise its dividends aggressively in the near future. This makes dividend increases of around 5% seem more likely in the short term based on its earnings. Perhaps it does have room to raise them more, especially if management is comfortable with a slightly higher payout ratio than Altria and Lorillard Inc. (NYSE:LO) have.

The company has $2.8 billion of cash and generated $922 million of free cash flow in the quarter that ended in March 2013.  It paid $326 million in dividends and bought back $325 million of stock in this quarter. This company is clearly in a strong financial position currently.

Conclusion

These companies all have strong financial positions and show nearly inevitable signs that dividends will be increased in the future.

How much dividends increase though, will be dependent on how good their earnings are. I feel that these companies offer unique opportunities to cash in on dividends with companies that are here to stay and that are dominant players in the market.

The article Dividend Health in These Major Tobacco Stocks originally appeared on Fool.com and is written by Anthony Parsons.

Anthony Parsons owns shares of Altria Group, Lorillard, and Reynolds American, Inc. (NYSE:RAI). The Motley Fool has no position in any of the stocks mentioned. Anthony 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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