How Long Can Dividends Keep Investors Interested in Tobacco?

With issues being raised about the tobacco industry's key growth driver, which is the best tobacco company to own?

Apr 12, 2014 at 7:30AM

The tobacco industry as a whole is a cash-flow-generating machine. The tobacco companies are paying out dividend yields that are well above other companies'. However, the question is, how long can tobacco companies continue paying out relatively high dividend yields with tobacco sales in decline? We're also seeing a number of issues being raised about e-cigarettes, which are supposed to be a key growth driver for the industry.

A bumpy road to growth
Many of the top tobacco companies are betting big on electronic cigarettes. Lorillard (NYSE:LO) owns the leading blu e-cig brand, while Reynolds American (NYSE:RAI) has been pushing its own brand, Vuse.

While e-cigarettes are expected to be one of the key drivers of the tobacco industry, there are a few issues. The public use of e-cigarettes is already banned in Brazil. A couple of cities in the U.S. are restricting the use of e-cigs in public places. And the FDA is looking to gain authority over e-cigarette regulation. This comes just as the CDC is seeing an uptick in poison-center calls due to exposure to the liquid nicotine in e-cigs. 

Why investors still love big tobacco
Lorillard and Reynolds American are two companies at the forefront of the industry, after news surfaced last month that Reynolds American had hired investment bank Lazard to help with analyzing the viability of buying Lorillard.

The merger would bring together two of the nation's largest tobacco companies. However, the immediate question is the antitrust hurdles. Worth noting is that Reynolds American and Lorillard's combined revenues would still be nearly 25% below that of the No. 1 U.S. tobacco company by sales, Altria

One of the main reasons investors continue to love tobacco companies is their high dividend yields. Thanks to solid free cash flow-generating abilities, Lorillard and Reynolds American pay dividend yields of 4.7% and 5.1%, respectively-- over double the S&P 500 average dividend yield. And each is generating annual free cash flow that's more than 5% of its market cap. That's a solid free cash flow yield.

More trouble on the horizon?
Besides the issues with e-cigs, another big overhang for Lorillard is the potential for further scrutiny for menthol cigarettes. Lorillard is the leader in menthol brand cigarettes, with its Newport brand. The FDA continues to push to restrict menthol cigarette sales, or possibly ban them altogether. This comes as menthol cigarettes are claimed to be more addictive. The European Parliament recently voted to ban menthol cigarettes by 2022.

On the other hand, Reynolds American might be in better shape. It has been introducing products that appeal to customers' changing demands. It has already launched a nicotine replacement product, called Zonnic Gum, which saves smokers from the harmful effects of tobacco. Reynolds American is also upping its smokeless offerings. This includes offering new mint favors for Camel brand snuff products, Camel SNUS.

The best bet on tobacco
With all that said, what might be one of the best plays in the tobacco industry is the international leader. Philip Morris International (NYSE:PM) owns nearly 16% of the international (excluding the U.S.) market share. It also pays an impressive dividend that yields 4.6%. Since it operates outside the U.S., it's not facing the same FDA scrutiny as other tobacco companies.

And with the leading international position in the cigarette market, Philip Morris is looking to boost its presence in unconventional cigarettes. Earlier this year, it entered into an agreement with Altria, where Altria will market two of Philip Morris' heated tobacco products in the U.S. And although it doesn't have a presence in the international e-cig market, it plans to enter it very soon.

Bottom line
While the tobacco industry is still a great place to find solid dividend yields, the recent issues should give investors a reason to have a closer look at their risks. While Philip Morris does have headwinds, they aren't quite as pronounced as the ones Lorillard and Reynolds American face. For investors still interested in gaining exposure to the tobacco industry, Philip Morris looks to be a great stock worth considering.

The 9-minute dividend strategy you need to know
One of the secrets that few finance professionals will openly admit is the fact that dividend stocks as a group handily outperform their non-dividend-paying brethren. The reasons for this are too numerous to list here, but you can rest assured that it’s true. However, knowing this is only half the battle. The other half is identifying which dividend stocks in particular are the best. With this in mind, our top income analyst put together a report outlining a simple 9-minutes-a-year dividend strategy that should be in every income investor’s toolkit. To learn more about this "tax-skipping" dividend trick, all you have to do is click here now.

Marshall Hargrave has no position in any stocks mentioned. The Motley Fool owns shares of Philip Morris International. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers