Consumer Sector Ideas

[gfp927z]

Tobacco Sector -- >>> 3 High Dividend Paying Stocks Worth Watching



By Madhu Dube

May 6, 2013

Tickers: MO, LO, RAI


http://beta.fool.com/madhudube/2013/05/06/3-high-dividend-paying-stocks-to-own/33109/?source=eogyholnk0000001




One of the major benefits of owning a stock from a maturing industry is that they pay good dividends. There are many companies that provide a good dividend yield, but my preference is companies that have a significant share of the maturing industry and are innovative, either in marketing or in product offerings.

I have picked three such companies from the tobacco industry -- Lorillard (NYSE: LO), Altria (NYSE: MO), and Reynolds American (NYSE: RAI) -- which are known for providing a dividend yield of more than 5%.





Company


5-Year Annual Average Dividend Yield





Lorillard


5.4%




Altria


6.5%




Reynolds American


6.5%


Betting on e-cig

Lorillard recently reported better than expected first-quarter results. It posted net sales of $1.58 billion, a growth of 3.3% year over year. Its operating profit was $438 million against analysts' estimate of $418 million. The company witnessed higher profitability because of a favorable pricing environment. In the traditional cigarette division, its prices increased 2.9%.

Lorillard also saw good response from the e-cigarette market. Its Blu e-cig generated retail sales of around $250 million. Lorillard is continuously expanding its geographic presence. Currently, this product is available in around 80,000 stores in limited stock-keeping units (SKUs). This provides an opportunity for further expansion into new markets in the form of adding more SKUs to the current stores. Considering this, the e-cig business looks on track to become a $1 billion business in 2013.

The company is also planning to launch a new rechargeable e-cig kit, which is expected to cost almost 50% less than traditional e-cig kits. This might dent profitability in the short run as the company will spend much in developing appeal for this product, but in the long run this will result in better sales.

Cashing with the retailers

Altria's first-quarter results gave a clear picture of the cigarette industry, where volumes are declining but profitability is increasing because of the better pricing environment and lower promotional spending. The company experienced a cigarette volume decline of 5.2%; however, this weak volume was offset by better pricing, which resulted in first-quarter profit of $1.38 billion.

It reported an increase of 4.9% per pack in net cigarette pricing. One of the positive catalysts for investors is the increasing market share of Marlboro. It currently has 43.6% market share, up 1% from the fourth quarter.

Additionally, the company is testing its Marlboro Leadership Price Two (MLP 2) program in Michigan and South Carolina. Under this program, retailers will have to increase the price by $0.10 per pack from the standard rate, and they will get $0.15 per pack in promo support from the company. The current MLP program gives retailers promo support of $0.20, but under this new program, retailers will increase prices, making it beneficial for them as well.

This will also improve profitability for the company and will lead to better acceptance of the higher prices by consumers. This will provide a platform for the company to increase prices in future. The company is currently testing this program in select locations to gauge consumer reaction.

Milking the cash cows

Reynolds experienced the highest volume decline of 8.7% in its first quarter among the three companies discussed. However, it reported improved profitability because of a 4% increase in net pricing. Strong quarterly pricing since the fourth quarter of 2011 has resulted in increased profitability despite high promotional spending.

Its top two brands, Camel and Pall Mall, are increasing market share, which is a good sign for the company in the midst of slowing volumes. Its Camel brand's market share is now 8.5%, up 0.1% year over year because its menthol version is gaining traction. Its Pall Mall brand has 9% market share, up 0.5% year over year due to better performance from the newly launched Pall Mall White and Pall Mall Black blends.

In the small but fast-growing e-cigarette market, sales of its Vuse brand will be expanded across many geographic locations this year. This provides a significant opportunity for the company, as it will have the advantage of launching its product in this category sooner than its largest competitor, Altria.

I don't think Reynolds will have any issue in providing dividends to investors in the long run, looking at share gain by top brands and opportunities in the e-cig market. I would recommend buying this stock for dividend seeking investors.

Harsh times, high profit

All these companies experienced declining cigarette volumes in the first quarter, but improved pricing should help these companies generate good profitability in future. Lorillard's should see an upside due to its growing Blu e-cig and its buyback program. Altria's should experience an upside as well from its new MLP program, which will improve its profitability.

Reynolds has faced the largest decline in volume, but its top brands, Camel and Pall Mall, which contribute to more than 50% of sales, are gaining market share. Its Vuse brand is also expected to gain traction once the company starts a complete rollout in the U.S.

There is no obvious issue which would cause the companies to reduce their dividend yield, so, for dividend-seeking investors, all three of these stocks are worth a watch.

Altria has been the best-performing stock of the past 50 years, but as the number of smokers in the U.S. continues to steadily decline, is Altria still a buy today? To find out whether everyone’s love-to-hate dividend stock is a savvy investment choice or a hazard to your portfolio, simply click here now for access to The Motley Fool's premium research report on the company.

<<<