In the tobacco sector, there's a plethora of equitie to choose from. Tobacco companies might all seem the same, but there's one in particular that deserves investors' attention the most. Read on to discover three key ways in which Altria Group (NYSE:MO) rewards its shareholders, and why, for these reasons, Altria leads its tobacco industry competitors.
A clear and honest dividend policy
Altria's management doesn't play games with its dividend. It knows that most of its investors are in the stock in large part for the dividend payments, and as a result, takes its commitment to an honest dividend policy very seriously. Altria's management has been very open with analysts and investors. Expect a dividend payout amounting to approximately 80% of its adjusted diluted earnings per share.
Thankfully, due to Altria's consistent business model, the company's full-year adjusted EPS projections have been very accurate. As a result, by doing some simple arithmetic, investors can forecast Altria's future dividends within a reasonable degree of accuracy. This makes an investment decision a more informed one.
A generous commitment to shareholders
On the subject of dividends, Altria is routinely one of the highest-yielding stocks in the S&P 500. And yet, the company still comes through with strong dividend growth, year in and year out. Consider Altria's track record of rewarding shareholders: the company has increased its payout 47 times in the last 44 years. And, let's be clear: these aren't token increases to keep the streak going.
Altria very recently gave investors a compelling 9% dividend increase. This is especially attractive, considering Altria sported a 5% yield before its dividend boost. Now, the stock pays you even more to own it—5.4% based on its current stock price. Plus, Altria rewards its shareholders with strong share buybacks in addition to hefty dividends.
Along with its dividend raise, the company recently announced a $700 million increase to its share buyback program, from its current $300 million authorization to its new level of $1 billion.
Altria certainly isn't alone among tobacco stocks sending lots of cash to investors. Reynolds American (NYSE:RAI) pays a strong 5% dividend, but it doesn't yield quite as much as Altria, and its last dividend increase was only 6.7%, less than Altria's rate of distribution growth.
Altria's hefty dividend yield and strong dividend growth compare very favorably to tobacco giant British American Tobacco (NYSEMKT:BTI), the company behind the Duhill, Kent, and Lucky Strike brands, among others. British American Tobacco pays a semi-annual dividend, with the company's two 2013 dividend payments producing a 3.8% yield. A 3.8% yield is nothing to sneeze at, considering that the broader market yields just above 2%. However, Altria's dividend amounts to roughly 150 basis points of additional income for investors.
The dominant industry brand
The Marlboro brand is one of the most valuable and easily recognized brands in the world. Altria simply dominates the tobacco industry in all its forms. The Marlboro brand holds 43% of retail share of U.S. smokeable products, and Altria's Copenhagen and Skoal chewing tobacco together control 51% of the U.S. smokeless product market.
In addition, Altria's brand power isn't in as much jeopardy as its competitors. Industry peers Reynolds American and Lorillard (NYSE:LO) have unique challenges to deal with that Altria doesn't. Lorillard and Reynolds American rely much more heavily on menthol cigarettes than Altria does, and this product is undergoing enhanced regulatory scrutiny. The Food & Drug Administration recently stated that it would look more closely into pursuing regulatory action on menthol.
While it's unlikely the FDA would ban menthol outright, there's a precedent investors should consider. In 2011, an advisory committee within the FDA ruled that removal of menthol from the tobacco marketplace would benefit public health greatly.
The Foolish takeaway
Altria is honest and open about its dividend policy. There's very little chance that investors will be surprised by a disappointingly low dividend increase if they follow the company and its underlying performance. Moreover, Altria continues to be one of the most generous companies with its shareholders. The company returns billions in cash to shareholders every year, and is fully committed to throwing off as much cash to investors as possible, while still responsibly maintaining and growing the business.
Stocks are breaking new all-time highs and interest rates remain near historic lows. As a result, investing in Altria and its 5.4% yield seems like as much of a no-brainer as there is in today's market.
Bob Ciura owns shares of Altria Group. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.