Tobacco stocks have long been a favorite among income investors. Why? For one, they often pay high dividend yields above 5%. A select few have also maintained long histories of raising their dividends, even during recessions.
On top of that, the industry enjoys multiple advantages that make it attractive for investment. The best names in tobacco have the ability to raise prices over time, while demand for tobacco products remains steady during economic downturns. The industry also benefits from high returns on invested capital as well as high barriers to entry.
As a result, tobacco stocks are ripe for the picking — particularly for income investors looking for high dividend yields and stable payouts.
InvestorPlace – Stock Market News, Stock Advice & Trading Tips
But what are the best opportunities in tobacco out there right now? These three stocks all have yields above 5%, consistent dividend track records and future dividend growth potential.
Tobacco Stocks to Buy: Altria (MO)
Source: Kristi Blokhin / Shutterstock.com
Dividend Yield: 8.01%
MO stock is probably one of the most notable tobacco stocks in the United States, with its flagship Marlboro brand commanding 40% retail market share. On top of that, Altria also owns the popular chewing tobacco brands Skoal and Copenhagen, Ste. Michelle wine and an approximate 10% investment stake in global beer giant Anheuser-Busch (NYSE:BUD).
Altria is a legendary dividend stock. The company has raised its dividend for 50 years in a row, placing it on the exclusive list of 30 Dividend Kings. In part, it owes success to its durable competitive advantages, generating extremely high returns on capital while reaping significant economies of scale in production and distribution.
And because it possesses the top brand, Altria can raise prices over time to grow revenue. MO has even continued to perform well in 2020 despite the pandemic. In the most recent quarter, revenue of $5.67 billion increased 4.9% year-over-year (YOY) and beat analyst estimates. Meanwhile, adjusted earnings per share (EPS) came to $1.19, beating projections by 4 cents.
Finally, in response to the declining smoking rate, it has also made investments in new categories, highlighted by the $13 billion purchase of a 35% stake in e-vapor company Juul. This gave Altria exposure to a high-growth category. On top of that, it also recently announced a $1.8 billion investment in Canadian cannabis company Cronos (NASDAQ:CRON). That made for a 45% equity stake in CRON, as well as a warrant to acquire an additional 10% ownership interest. Lastly, Altria has put extensive research and development into its own heat-not-burn tobacco product IQOS.
The combination of vaping, marijuana and new tobacco products will fuel Altria’s future growth, even if traditional cigarettes continue to decline. Its investment in Anheuser-Bush as well as in wine and smokeless tobacco businesses will also continue to provide growth, securing its hefty dividend.
Philip Morris International (PM)
Source: defotoberg / Shutterstock.com
Dividend Yield: 5.65%
Next on my list of tobacco stocks is Philip Morris International, a company that spun off from Altria over a decade ago. Today, PM sells the Marlboro brand and many others outside of the United States. While Altria dominates the States, PM has the rights in international markets.
While 2020 has negatively impacted PM stock, it has performed relatively well considering the difficult operating climate. Net revenue declined 1.5% in Q3 2020, as many international markets have experienced an economic downturn due to the pandemic. However, the company’s ability to raise prices drove 6.5% revenue growth per unit and 5.6% adjusted diluted EPS growth. Over the first three quarters combined, adjusted diluted EPS rose 7.4%.
So, Philip Morris’ consistent profitability and steady earnings growth has allowed the company to maintain its dividend. PM even delivered a 2.6% dividend increase in September.
Like Altria, the company has also waged its future on new products. But whereas MO has meaningfully expanded into adjacent vice categories such as beer, wine and marijuana, PM is staking its future on IQOS. The company greatly increased its capital expenses in the last two years in order to develop and manufacture this new product. IQOS has met great success in some markets, like Japan and Korea.
The revenue generated by PM’s reduced-risk portfolio has gone from essentially zero in 2014 to nearly $5 billion annually (Page 13). Over the first nine months of 2020, PM’s reduced-risk products (RRPs) accounted for 23% of its total revenue in that period. Continued growth from RRPs will allow the company to keep increasing its dividend.
Universal Corporation (UVV)
Dividend Yield: 6.20%
Universal Corporation is one of the world’s largest leaf tobacco exporters and importers. The company is a wholesale purchaser and processor of tobacco operating between farms and the companies that manufacture cigarettes, cigars and pipe tobacco.
Like Altria, Universal is a Dividend King, as it has also raised its dividend payout for 50 consecutive years. Because of its leadership position in processing, UVV has also maintained a long track record of steady profitability in the face of declining smoking rates. In addition, price increases have offset reduced demand, helping the company stay profitable. Last year it reported adjusted EPS of $3.49 Maintaining that consistent profitability has allowed the company to return excess profits to shareholders through dividends and share repurchases.
Going forward, Universal intends to continue diversifying its business model. In response to the falling smoking rate, it has branched out into processing other produce like fruits and vegetables. In fact, the firm has conducted multiple acquisitions in this area to accelerate efforts.
For example, last year UVV acquired FruitSmart, a specialty fruit and vegetable ingredient processor. FruitSmart supplies juices, concentrates, blends, purees, fibers and more to food, beverage and flavor companies around the world. On Oct. 1, Universal also completed its acquisition of Silva International, a dehydrated vegetable, fruit and herb processing company.
These efforts should help UVV stock adapt to the difficult situation facing the tobacco industry as well as allow it to maintain the Dividend King title. That makes this name a top contender among tobacco stocks for the income investor.
On the date of publication, Bob Ciura held a long position in MO.
Bob Ciura has worked at 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 bachelor’s degree in Finance from DePaul University and an MBA with a concentration in investments from the University of Notre Dame.
More From InvestorPlace
The post Income Investors Should Consider These 3 Tobacco Stocks appeared first on InvestorPlace.