Please ensure Javascript is enabled for purposes of website accessibility

Which Tobacco Giant Is the Best Dividend Stock?

By Dan Caplinger - Jan 20, 2016 at 4:31PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The industry is known for its healthy payouts, but which dividend stock has the edge?

Image source: Philip Morris International.

The tobacco industry has been kind to dividend investors over the decades, making lucrative payouts even as their share prices have generally risen as well. Leading companies Altria Group (MO 0.04%), Reynolds American (RAI), and Philip Morris International (PM -0.23%) all have their followings among dividend investors, but some want to know which one is truly the best dividend stock. Below, we'll compare the three companies on a variety of different measures that are important to dividend investors.

The simplest way to evaluate dividend stocks is by current yield, and doing so here produces a clear winner. Reynolds American's yield is currently only 3%, and Altria Group pays a shade under 4% right now. But Philip Morris International has a much higher yield of more than 4.5%.

Interestingly, many investors expected Philip Morris to sustain a lower dividend yield than its domestic counterparts. At the time of its spinoff from Altria, Philip Morris was seen as having higher growth potential because of more favorable regulatory environments overseas. However, many countries have followed the lead of the U.S. in attempting to regulate tobacco, and so Philip Morris hasn't gotten the growth edge that might have caused its stock to trade at a substantially higher multiple and lower its yield.

A great dividend stock doesn't just have a good current yield. It also has to show an ability to boost its dividend over time. All three tobacco companies here have a history of raising their payouts substantially.

Over the past 10 years, Reynolds American has seen its dividend go from $0.15625 per share to $0.36 per share on a quarterly basis, a rise of 130%. Philip Morris has only been an independent company since 2008, but since then, the dividend has jumped from $0.46 to $1.02 per share quarterly, or 120%.

Altria is a special case. Its dividend has actually dropped, but that stems from spinoffs of Philip Morris International and Kraft, both of which used to be under Altria's corporate umbrella. In just the past five years, Altria has boosted its dividend by nearly 50%, and its history of consistent dividend increases goes back for decades.

By these measures, it's hard to pick a winner. All three have strong dividend growth over the long run. Philip Morris International's dividend growth has slowed in the past year, but it could reaccelerate if the strong U.S. dollar stops holding back its overseas results.

Just as important as paying a dividend is being able to keep paying that dividend. Looking at the earnings payout ratio can help on that score by showing what impact a drop in earnings could have on its ability to sustain current dividend levels.

Philip Morris International and Altria Group have been aggressive about making dividends a major part of their capital allocation strategy. Philip Morris has a dividend payout ratio of 88%, while Altria Group weighs in around 85%. Both stocks have targeted the 80% range for long-term payout ratios, but Philip Morris has felt pressure from weaker foreign currencies that have hampered its earnings growth recently.

By contrast, Reynolds has a much lower payout ratio of 45%. However, that reflects some unusually high earnings that resulted from the tobacco giant's divestiture of various assets as part of the Lorillard merger. When you look further into the past, you'll see payout ratios that have tended to fall in a similar 75% to 95% range as its peers.

The right dividend stock for you
Looking at all three tobacco companies, the only clear conclusion is that if you're solely focused on current yield, Philip Morris International is the stock you'll want. Reynolds American has a lot of growth potential from its Lorillard merger, and Altria has embraced adjacent industries like beer to diversify its tobacco exposure. Philip Morris is the pure play on international growth, and so those who expect overseas tobacco markets to outperform will want to choose it. Yet its domestic counterparts have attractive elements of their own that also make them suitable for dividend investors.

Dan Caplinger has no position in any stocks mentioned. 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Altria Group, Inc. Stock Quote
Altria Group, Inc.
$45.15 (0.04%) $0.02
Philip Morris International Inc. Stock Quote
Philip Morris International Inc.
$99.24 (-0.23%) $0.23
Reynolds American Inc. Stock Quote
Reynolds American Inc.

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/13/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.