Which Tobacco Company Provides the Best Returns?

Which tobacco company provides the best investor returns, Lorillard (LO.DL), Reynolds American (RAI), Altria (MO 1.45%), or international giant Philip Morris (PM -2.96%)? This is a question investors often ask because while all four companies generate similar amounts of cash and they have equally wide profit margins, their cash returns to investors vary wildly.

For example, Philip Morris is well known for its impressive stock buybacks, the most recent of which was the multi-year $18 billion buyback that is still in progress. However, Altria, formerly Philip Morris' partner in crime and owner of the Philip Morris USA brand, is only returning $1 billion to investors through buybacks over the space of five quarters. 

So, let's try to figure out which tobacco giant looks after its shareholders the best.

Crunching numbers
To try and figure out which company offers the best returns, I'm going to take the total amount spent by each company on both buybacks and dividends and then divide this sum by the current number of shares in issue. This should give us an indication of how much cash the company returns per share, which we can then compute into a percentage-per-year figure.

I'll try and keep things simple so I don't end up spewing out a whole lot of numbers in one go.

Philip Morris is the biggest of the bunch, so it seems like a good place to start. During 2012, Philip Morris spent $5.4 billion on dividends and $6.5 billion on repurchasing stock. With 1,762 million shares outstanding at the beginning of 2012, in total, Philip Morris returned $6.75 per share to investors throughout 2012. 

Next up, the second-largest company in the group is Altria. Now, as mentioned above, Altria is not a fan of buybacks, but it does offer investors the largest dividend yield in the sector of 5.2%. Altria returned a total of $4.4 billion to investors during 2012. With 2,024 million shares in issue this works out to around $2.17 per share, less than Philip Morris. Nevertheless, before we jump to conclusions, we still need to figure out how much this was as a percentage of the company's overall stock price, shown below.

Third, we have Reynolds American, which returned $2.4 billion to investors throughout 2012 with both buybacks and dividends. With 585 million shares outstanding at the beginning of 2012, that works out to around $4.10 per share.  Finally, the group's smallest, Lorillard, returned a total of $1.38 billion to investors during 2012, which works out to around $3.38 per share.

But how much do I get?
With these numbers in mind, which company returned the most as a percentage of its overall share price? In other words, if you brought shares in each company at the beginning of 2012, what percentage of the share price would have been returned to you through both buybacks and dividends?

Figures in $US. Share price is taken from the first trading day of 2012. *Split adjusted

As the table shows, although Philip Morris returned the highest dollar amount per share to investors, the company's high stock price meant that the return only came to 8.8%. Still, this return was not as bad as that from Altria, which only returned 7.6% per share to investors.

All in all, we can see that Reynolds American has returned the most to investors through both buybacks and dividends during the past year.

Will this continue?
Of course, the most important question to ask is if these returns will continue. It would appear so as all four companies listed above are easily able to cover their dividend payouts with cash from operations. Indeed, based on the numbers for the first nine months of this year, Philip Morris' dividend payout was covered 1.8 times by cash from operations,  Altria's payout was covered 1.3 times,  Lorillard's dividend was covered 1.7 times,  and Reynolds' payout was covered 3 times, excluding extraordinaries.  So, it would appear that these companies' dividend payouts are safe. What's more, all four companies are in the middle of share repurchase programs, which are not likely to end prematurely and which will last through the majority of next year.

All in all, for the time being, it is likely that returns of the scale shown above will continue for the next year at least.

Foolish summary
Overall, while Philip Morris' multi-billion dollar share buybacks may look impressive, it would appear that the company's shareholder return lags those of its smaller peers Reynolds American and Lorillard. With this being the case, if you're looking for cash returns in the tobacco sector, Reynolds American should be your stock of choice.