Dividend Comparison – Tobacco

Tobacco companies manufacture, market and sell cigarettes and other tobacco products. The tobacco giants have been cash cows for many investors as they pay hefty dividends and raise the dividends year after year. The tobacco customers, once hooked, are customers for life except for a small percentage of quitters.
tobacco
The major players in the tobacco industry are listed below.

Company Name Ticker Quote Mkt Cap P/E Yield 5-yr DGR
Altria MO $35.55 $71B 16.23 5.40% 14.30%
British American
Tobacco
BTI $107.57 $102B 16.48 3.95% 10.01%
Lorillard LO $45.11 $16B 14.03 4.88% N/A
Philip Morris PM $90.47 $146B 17.55 4.16% N/A
Reynolds American Inc RAI $49.96 $27B 18.15 5.04% 7.80%
Some tobacco companies listed above have massive amounts of debt. The debt/equity ratio for Altria (MO) is 4.17. Lorillard (LO) and Philip Morris (PM) have negative equity and as a result the debt/equity number remains meaningless. The book value/share for LO is -4.95 and PM is -3.37. The amount of debt and negative equity of these companies keeps me away, even though the the stockholders have been rewarded with a YTD performance of 17.56% (MO), 19.12% (LO), 10.25% (PM).
The other two listed tobacco giants have better and manageable debt – BTI with a debt/equity of 1.79 and RAI with a debt/equity of 1.10.

My Thoughts

The tobacco industry faces more challenges around the world – facing an increased resistance in marketing and sales of the product, litigation and acknowledgement from the public about the health risks associated. The western world taxes cigarettes highly (with the exception of US – although some states in the US tax cigarettes more than others) in order to get people to quit as it puts immense load on the public health system.
Some companies have had decent success by getting into the e-cigarette business and others such as Altira have diversified by producing and selling alcohol products. All things considered, I have decided to stay away from the tobacco companies for now and look for a better valuation in the future to invest in them.
Disclosure: None
Disclaimer: The information provided here is for educational purposes only. All opinions here are my personal opinions and should not be taken as financial advice. I am not qualified to be a financial advisor. Always consult with your financial advisor before investing in any of the companies mentioned on this blog.

2 thoughts on “Dividend Comparison – Tobacco

  1. I haven’t seen this in any of their annual reports but I saw it on a comment stream on an article about PM concerning their debt level. The reason they gave for the high debt levels and negative book values was so they have negative assets should they be sued. Not sure how valif it is but it makes perfect sense. You can’t go after assets if there’s a net negative position. The debt is one issue but I think they have the advantage of such an addictive product that they can pass on annual increases and no one reallty bats an eye. The consistency of their business model allows them the option to have elevated debt positions because they know their earnings are steady. I’m not a big fan of the pure domestic plays though. Much prefer PM and their international exposure.

    • Interesting take, PIP. I am not sure how that would stand in court against a litigation. But then again, I am not a legal expert. It definitely makes for an interesting case and needs further investigation to find out when and at what rate their debt issuance expires. My first thought was that they could have issued a lot more bonds now that the interest rates are so low, but some digging suggests that they already had a lot of debt before the crisis.

      I agree that PM is a better play with its international exposure than a more domestic play such as MO. I find BTI has a very strong list of brand names and is also an international play giving PM a run for their money.

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