The past year has been a terrific one for the overall stock market, but there are a couple of dividend payers that didn't participate in the rally.
The market keeps blowing smoke in big tobacco's direction. In particular, shares of tobacco giants British American Tobacco (BTI -0.51%) and Altria Group (MO -0.37%) are down by double-digit percentages over the past 12 months. Both have long histories of making and raising their dividend payouts, but their stock prices have been beaten down anyway.
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Cigarette smoking has been in decline for decades. The soaring popularity of illicit vaporizers full of fruit-flavored nicotine is accelerating that decline.
Tobacco companies are allowed to sell tobacco-flavored e-cigarettes, but their sales volumes have been held back by illicit competition from products that feature the fruity flavors that teens and adults appear to prefer. It might not happen in 2024, but it is just a matter of time before illicit vaporizers with flavors the Food and Drug Administration (FDA) doesn't approve of become harder to access.
Warning letters sent from the FDA to retailers selling illegal e-cigarettes haven't been too effective at curbing the sales of flavored nicotine vapes. More recently, government agencies have begun combining efforts with some success. In December, the FDA, working in collaboration with Customs and Border Protection, seized 1.4 million units of unauthorized e-cigarette products.
The popularity of flavored e-cigarettes that legitimate tobacco companies haven't been allowed to sell since 2020 is the biggest challenge the industry has faced since government regulators forced Joe Camel into hiding in the late 1990s. In another 25 years, a look back on the tobacco industry's present challenge with illicit flavored e-cigarettes will probably look like a hiccup, too. In the meantime, the dividends these stocks offer will more than likely continue rising.
British American Tobacco
Shares of British American Tobacco are down about 26% over the past year. At their beaten-down price, they offer a 9.3% yield. In May 2018, the company began dividing an annual dividend payment into four equal quarterly installments.
British American Tobacco has increased its payouts by 18% since 2018, and given how well it's funded, it probably won't be an issue for management to keep raising them in the years ahead. The company generated $11.9 billion in free cash flow during the 12-month period that ended in June. It needed just 50% of that sum to meet its dividend commitment.
The volume of combustibles sold in the first half of 2023 fell 5.8% year over year, but its pricing power on brands like Newport and Camel saved the day. By raising its prices per pack, it more than compensated for falling volumes, lifting combustibles revenue by 1.8% year over year.
While powerful brands keep combustible cigarette revenues from contracting, British American Tobacco's non-combustible product sales are booming. Sales of products in new non-combustible categories jumped 29% year over year, and were responsible for about 12% of total revenue. If customs officers keep seizing millions of illicit flavored vaporizers before they can enter the U.S. market, the company's non-combustible sales could rise even faster.
Altria Group
Shares of Altria Group (MO -0.37%) fell about 11% over the past year as illicit e-cigarettes cut into the growth of its own non-combustible product sales. Declining combustible cigarette sales and pressure from the illicit market for non-combustibles drove total revenue down 2.5% year over year.
Shrinking revenues in early 2023 didn't stop Altria from raising its dividend in August -- the company's 58th payout hike in 54 years. At recent share prices, the dividend yields a huge 9.4%, and another raise in August 2024 seems likely. Despite competition from illicit e-cigarettes, its adjusted earnings during the first nine months of 2023 were up 3.3% year over year.
Altria's profitable operation delivered $8.5 billion in free cash flow over the 12-month period that ended in September. The company needed 79.4% of this figure to meet its dividend commitment. As such, the payout isn't as well covered as investors would like it to be, but the company shouldn't have any trouble raising it in line with overall profit growth.
In addition to marketing the extremely popular Marlboro brand in the U.S., Altria Group's NJOY brand is the only one approved by the FDA to sell a pod-based vapor product. This leaves the company well positioned to benefit from seizures of illicit flavored e-cigarettes that could ramp up in 2024. Buying the stock now and holding it until nicotine is no longer addictive would be a great way to boost your passive income stream.
