When it comes to dividend-paying stocks, income investors would do well to determine the best areas in which to buy. Some sectors lend themselves to longevity, stable earnings and strong fundamentals. One of those sectors is tobacco stocks, which collectively offer investors many attributes that make great dividend-paying stocks.
One of those attributes is very low levels of capital spending and high margins. This leads to very large free cash flow, which companies then return to shareholders via dividends in most cases. In this article, we’ll take a look at the best tobacco stocks that have high dividend yields and impressive dividend increase histories.
Here are 3 tobacco stocks to buy for high dividend yields:
The three tobacco stocks in this article have high dividend yields and reasonably safe payouts. They all also offer a solid track record of dividend growth, and given their ability to generate free cash flow, I don’t think that will change anytime soon.
High Yield Tobacco Stocks: Philip Morris International (PM)
Philip Morris is a manufacturer and distributor of cigarettes and nicotine products, smokeless products, and electronic devices and accessories. The company’s smoke-free IQOS platform has helped it diversify against tobacco, but the company’s cigarette brands continue to be among the most popular in the world and still account for the vast majority of revenue. total. This is particularly reassuring in the face of the ongoing legal challenges which just put your IQOS extension on hold.
Philip Morris reported second quarter results on July 20, 2021, and results have been mixed, beating consensus estimates for earnings, but below the top line. The company reported total revenue of $ 7.6 billion, up 14% from the same period last year. The volume of shipments increased 6% year-on-year, the volume of cigarette shipments increased by 3% and the volumes of heated tobacco increased by 30%.
Adjusted earnings were $ 1.57, up from $ 1.29 in the second quarter of 2020. The company also authorized a new $ 7 billion share buyback program and updated its guidance for the year to $ 5.97 to $ 6.07 in earnings per share.
Philip Morris’s earnings growth history has been uneven, with earnings per share in 2011 higher than in 2017, for example. However, one thing that has not wavered over the past 13 years is the company’s ability to increase its dividend.
Indeed, Philip Morris has increased his payout every year since its spin-off to become an independent company in 2008. The current return is 4.8%, the lowest on this list, but still more than three times that of the S&P 500.
We see the payout ratio at 80% of profit for this year, quite typical for a tobacco company. Since capital expenditures are very low, almost all of the company’s profits are translated into free cash flow, which can then be distributed to shareholders. For this reason, and the fact that Philip Morris is expected to deliver 3% annual earnings per share growth in the coming years, investors should have no worries about the safety of dividends.
Altria Group (MO)
Our next stock is Altria, another manufacturer and distributor of cigarettes, smokeless tobacco and tobacco alternatives in the United States. The vast majority of income for Altria, like Philip Morris, comes from cigarette sales. But like Philip Morris, Altria is also investing heavily in alternatives to cigarettes after saying she will stop selling cigarettes within the next 10 years. This includes products like on !, Juul, and the company’s investments in other publicly traded companies.
Altria was founded in 1822, generates approximately $ 21 billion in annual revenue, and trades with a market capitalization of $ 88 billion. The stock is also trading with a current yield of over 7%.
Altria released its second quarter results on July 29, 2021, and the results were better than expected in terms of revenue and earnings. Total revenue increased 9% to $ 6.9 billion as all of the company’s operating segments generated higher revenues. Net of excise taxes, revenues increased 11% to $ 5.6 billion.
The core smoking products segment saw its revenue increase by 8%, mainly due to higher prices and shipping volumes, which were partially offset by higher promotional investments. Net of excise duties, turnover is up 10% for this segment.
Reported profit for the segment was also 13% higher year-over-year, driven by higher prices and volumes, as well as operating leverage reducing relative expenses. The company’s adjusted earnings per share were $ 1.23, up 13% year-over-year.
Altria has an exemplary dividend history, having increased its dividend for more than half a century in a row, and qualifying it for the coveted title of King of dividends. The payout ratio is approaching 80%, but Altria’s predictable and high levels of free cash flow mean dividend security concerns are minimal.
Additionally, Altria’s current return is huge at 7.2%, about six times that of the broad market.
Universal Society (UVV)
Our final stock is Universal Corporation, a global processor and supplier of leaf tobacco and herbal ingredients. The bulk of Universal’s business is the distribution of tobacco leaves, but it also has a large ingredients business serving food and beverage manufacturers with various products.
Universal was founded in 1886, generates approximately $ 2 billion in annual revenue, and trades with a market capitalization of $ 1.3 billion.
Universal outlet full year earnings on May 26, 2021, and the results were somewhat weak compared to the period of the previous year. The company reported fourth quarter revenue of $ 620 million, about 2% lower than the same period a year ago. Raw leaf tobacco volumes were down slightly year over year, and the third quarter saw demand pick up and inflate results for this period.
Earnings per share totaled $ 2.15 in the fourth quarter, well ahead of the $ 1.58 produced in the fourth quarter of the previous year. Universal said it will see higher earnings per share for this year, so we forecast $ 4.35 earnings per share, which would be slightly higher than the $ 4.25 produced the previous year.
Universal has a truly exceptional dividend history, having increased its payout for 50 consecutive years and qualifying it for the coveted title of Dividend King. Universal’s earnings growth has been subdued in recent years, but it continues to generate substantial free cash flow which it returns to shareholders. Universal’s current yield is huge at 6%.
We see the payout rate at just 72% for this year, which means that the dividend should be able to be increased for many years to come. Even with slightly lower tobacco leaf volumes over time, Universal’s buyback program and its ingredients business should be able to keep rising earnings per share at a low single-digit rate for the foreseeable future.
As of the publication date, Bob Ciura does not have (directly or indirectly) any position in any of the stocks mentioned in this article. The opinions expressed in this article are those of the author, subject to the InvestorPlace.com Publishing Guidelines.
Bob Ciura has been with Sure Dividend since 2016. He oversees all content for Sure Dividend and its partner sites. Prior to joining Sure Dividend, Bob was an independent equity analyst. His articles have been published on major financial websites such as The Motley Fool, Seeking Alpha, Business Insider and more. Bob received a BA in Finance from DePaul University and an MBA with a concentration in Investments from the University of Notre Dame.