Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Light up Your Portfolio With These Tobacco Stocks

Dividend stocks are different from most other investments, where you don't realize a profit until you sell. Even if the stock price does not soar, an investor still gets some cash to pay the bills with from time to time. However, most investors find it boring to invest in dividend stocks--it is far more exciting to speculate on the rise and fall of stock prices. However, dividend stocks offer several advantages over non-dividend stocks.

First of all, dividend stocks are typically mature and stable businesses that can afford to share profits with shareholders. Dividends serve as an important component of the total return. To put this into perspective, dividends have accounted for roughly 40% of the U.S. stock market's return since 1930. Moreover, dividend stockholders can also ride out short-term price fluctuations without selling off shares. I suggest that long-term investors choose consistent dividend-providing companies with strong balance sheets and rising cash flows.

Some of these companies are tobacco stocks, including Lorillard  (NYSE: LO.DL  ) , Altria  (NYSE: MO  ) , Reynolds American  (NYSE: RAI  ) and Philip Morris International  (NYSE: PM  ) . These companies have provided good returns to investors over the last three years through steady revenue growth and operating leverage, in addition to shareholder-friendly activities like dividends and share repurchases.

Lorillard, Altria, and Reynolds American all yield more than 5%, while Philip Morris offers a dividend yield of 4.30%. Does that make Philip Morris less attractive? Let's study the dividend yields and payout ratios that make up the dividends of these companies to find out.



Reynolds American

Altria Group

Philip Morris

Dividend Yield





Payout Ratio





We can see that although Philip Morris has the lowest dividend yield among these companies, it also has the lowest payout ratio. It is important to note that Altria and Reynolds American have very high payout ratios. This simply means that these companies are paying a higher portion of their earnings to their shareholders, and thus the sustainability of such high dividend yields is uncertain. Lorillard on the other hand looks impressive based on these comparisons. Lorillard's payout ratio is similar to the ratio for Philip Morris, but Lorillard still provides a highly-attractive 5.10% dividend yield. 

However, it is essential to look at the valuations to analyze which of these stocks are trading for less than they are worth. The following table summarizes the valuation metrics (forward P/E and price-earnings-growth ratio) of these tobacco companies.



Reynolds American

Altria Group

Philip Morris

Forward P/E





PEG Ratio





We can see that Lorillard trades at more than a 10% discount to Reynolds American, Altria Group and Philip Morris. Even if we use a PEG basis, Lorillard looks highly undervalued with respect to its peers with a PEG ratio of just 1.08. Last year, Lorillard diversified its portfolio by acquiring Blu e-cigs, and its electronic-cigarette market share has expanded to 40% in the last quarter. The revenue from electronic cigarettes represents a small fraction of its overall revenues, but in my opinion the rising popularity of electronic cigarettes could be a potential game changer.

While Reynolds American and Altria look expensive, Philip Morris looks fairly priced. Emerging markets like Asia, with its expansive and growing population, represent a tremendous opportunity for the company. Specifically, countries like China (the largest tobacco market in the world), Indonesia (Asia's second largest tobacco market with a 32% smoking prevalence rate) and the Philippines (fast growing market where Philip Morris has a more than 90% share) should prove to be the engine of growth for years to come.

The Bottom Line

I think Lorillard is the best bet among tobacco stocks. The company's highly attractive dividend yield is not merely a result of a high payout ratio, as we have seen with Altria Group and Reynolds American. The company has huge potential for future growth with a strong hold on the growing electronic cigarette market and represents a good bargain at current levels. Philip Morris is also a good bet given its international exposure, better expected growth rate than its peers and the strong hold of the Marlboro brand in the global market.

Dividend stocks can make you rich. It's as simple as that. While they don't garner the notoriety of high-flying growth stocks, they're also less likely to crash and burn. And over the long term, the compounding effect of the quarterly payouts, as well as their growth, adds up faster than most investors imagine. With this in mind, our analysts sat down to identify the absolute best of the best when it comes to rock-solid dividend stocks, drawing up a list in this free report of nine that fit the bill. To discover the identities of these companies before the rest of the market catches on, you can download this valuable free report by simply clicking here now.

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2651408, ~/Articles/ArticleHandler.aspx, 5/25/2016 9:01:28 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Neha Gupta

Today's Market

updated 11 hours ago Sponsored by:
DOW 17,706.05 213.12 0.00%
S&P 500 2,076.06 28.02 0.00%
NASD 4,861.06 95.27 0.00%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

6/12/2015 4:05 PM
LO.DL $0.00 Down +0.00 +0.00%
Lorillard, Inc. CAPS Rating: ****
MO $63.79 Up +0.55 +0.00%
Altria Group, Inc. CAPS Rating: ****
PM $98.84 Up +0.56 +0.00%
Philip Morris Inte… CAPS Rating: ****
RAI $50.70 Up +0.82 +0.00%
Reynolds American,… CAPS Rating: ****