Investors who seek high dividend yield tend to pick a tobacco company. Among the leading tobacco companies in the US, Altria Group Inc (NYSE:MO) gets the most attention on account of its high market cap. Putting the market cap aside, how is this tobacco company performing compared to other leading tobacco manufacturers? Is this company still worth owning?
During 2012 shares of Altria Group Inc (NYSE:MO) have only slightly risen. Other leading tobacco companies’ such as Lorillard Inc. (NYSE:LO) or Reynolds American, Inc. (NYSE:RAI) haven’t done any better in the last year. Since the beginning of 2013, however, all three companies’ shares have rallied along with the rest of the market: shares of Altria Group Inc (NYSE:MO) rose by 9.4% (year-to-date). In comparison, the S&P 500 index rose by slightly more than 10%, shares of Reynolds American, Inc. (NYSE:RAI) increased by 7.4%, and Lorillard Inc. (NYSE:LO)’s stock rose by only 3.8%. So how is Altria doing so far?
Profitably
In terms of profit margins, Altria is in the middle of the pack with an operating profitably of little under 26%. In comparison, Philip Morris International Inc. (NYSE:PM) has a much lower margin of little under 18%. In 2012, the leader of the pack was Lorillard Inc. (NYSE:LO) with a profit margin of over 28%. The chart below shows the developments of the operating profitability of leading tobacco companies in the past several years.
These companies have maintained a steady and relatively high profit margin over the years. If they keep these margins high, investors are likely to keep getting the high dividend yields they’ve grown accustomed to.
Dividend
Since the split between Altria Group Inc (NYSE:MO) and Philip Morris International back in 2008, Altria has kept raising its dividend payment every year. The current yearly dividend stands at $1.76 per share, which comes to an annual yield of a little over 5%. Moreover, the company maintains a high payout ratio that reached 83% in 2012. Other leading tobacco companies offer not only high dividend yields but also high payout ratios: Reynolds pays $2.36 per share per year, which comes to an annual yield of 5.3%, Philip Morris International Inc. (NYSE:PM) offers a yearly dividend of $3.40 per share, which is an annual yield of 3.7%, and Lorillard Inc. (NYSE:LO) pays $2.20 per share per year, which comes to a 5.45% yearly yield. This means, even in terms of dividend yield, Altria is in the middle of pack. As indicated in the table below, Altria is second to Reynolds in terms of payout ratio (as of 2012).
The two main reasons, in my opinion, to keep Altria over other tobacco companies are the company’s consistent high market share in the American tobacco industry, which is currently around 50%, and its rise in revenues.
Growth
Despite the decline in the number of people who smoke in the U.S, Altria Group Inc (NYSE:MO) was able to present moderate revenue growth of almost 3.5% during 2012 compared to 2011. Other leading tobacco companies have a lower growth rate, and Reynolds’ revenues declined by almost 2.8% during 2012. The chart below shows the revenue growth of these tobacco companies.
Lawsuits
When you talk about tobacco companies you have to say something about the lawsuits these companies face; they are among the main risk factors when holding a tobacco company. As of 2011, Altria had more than 120 pending cases, including 82 individual smoking and health cases (according to the company’s 2011 annual report). But after the big settlement between tobacco companies and the States from back in 1998, the uncertainty around Altria’s future was reduced substantially.
Altria Group Inc (NYSE:MO), much like other tobacco companies, will continue to have the threat of lawsuits over their head. But as long as tobacco companies continue paying the $206 billion settlement (up to now the companies have paid $85 billion), tobacco companies won’t go anywhere.
Bottom Line
Altria doesn’t have the strongest numbers compared to other leading tobacco companies in terms of dividend or profit margins. But the company maintains its high market share and continues to grow at a faster pace than its competitors. This is likely to keep it an attractive investment.
The article Is This Tobacco Company Still Smoking Hot? originally appeared on Fool.com and is written by Lior Cohen.
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