When it comes to dividend stocks, income investors would do well to determine the best sectors to buy from. Certain sectors lend themselves to longevity, stable earnings and strong fundamentals. One such sector is tobacco stocks, which collectively offer investors many of the attributes that make for great dividend stocks.
One of those attributes is very low levels of capital expenditures, and high margins. This leads to very strong free cash flows, which the 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 histories of dividend increases.
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 strong dividend growth histories, and given their ability to generate free cash flow, I don’t see that changing anytime soon.
High-Yield Tobacco Stocks: Philip Morris International (PM)
Philip Morris is a manufacturer and distributor of cigarettes and nicotine products, smoke-free products, and electronic devices and accessories. The company’s IQOS smoke-free platform has helped it diversify against tobacco, but the company’s cigarette brands continue to be some of the most popular across the world, and still comprise the vast majority of total revenue. That’s especially reassuring in the face of ongoing legal challenges that just put its IQOS expansion on hold.
Philip Morris sells its products internationally, and generates about $31 billion in total revenue. The company was founded in 1987 and trades with a market capitalization of $154 billion.
Philip Morris reported second quarter earnings on July 20, 2021, and results were mixed, beating consensus estimates for earnings, but falling short on the top line. The company reported total revenue of $7.6 billion, which was a 14% gain compared to the year-ago period. Shipment volume was up 6% year-over-year, as cigarette shipment volume was up 3%, and heated tobacco volumes soared 30%.
Adjusted earnings were $1.57, up from $1.29 in Q2 of 2020. The company also authorized a new $7 billion share repurchase program, and updated guidance for the year to $5.97 to $6.07 in earnings-per-share.
Philip Morris’ earnings growth history has been spotty, with earnings-per-share in 2011 coming in higher than that of 2017, for instance. However, one thing that hasn’t wavered for the past 13 years is the company’s ability to raise its dividend.
Indeed Philip Morris has raised its payout every year since it was spun-off to be an independent company in 2008. The current yield is 4.8%, the lowest on this list, but is still more than three times that of the S&P 500.
We see the payout ratio at 80% of earnings for this year, fairly typical for a tobacco company. Since capex is very low, substantially all of the company’s earnings translate to free cash flow, which can then be distributed to shareholders. Because of this, and the fact that Philip Morris should produce 3% annual earnings-per-share growth in the coming years, investors should have no dividend safety concerns.
Altria Group (MO)
Our next stock is Altria, another manufacturer and distributor of cigarettes, smokeless tobacco, and tobacco alternative products in the U.S. The vast majority of Altria’s revenue, like Philip Morris, comes from cigarette sales. But like Philip Morris, Altria is also investing heavily in cigarette alternatives after having stated it will cease 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 about $21 billion in annual revenue, and trades with a market capitalization of $88 billion. The stock also trades with a current yield of more than 7%.
Altria reported second quarter earnings on July 29, 2021, and results were better than expected on both the top and bottom lines. Total revenue was up 9% to $6.9 billion, as all of the company’s operating segments produced higher revenues. Net of excise taxes, revenue was up 11% at $5.6 billion.
The core smokeable products segment saw revenue rise 8%, primarily from higher prices and shipment volumes, which were partially offset by higher promotional investment. Net of excise taxes, revenue was up 10% for this segment.
Reported income for the segment was also 13% higher year-over-year, driven by higher pricing and volumes, as well as operating leverage reducing relative expenses. Adjusted earnings-per-share for the company came to $1.23, up 13% year-over-over year.
Altria has an exemplary dividend history, having boosted its dividend for more than half a century consecutively, and qualifying it for the coveted title of Dividend King. The payout ratio is nearing 80%, but Altria’s predictable and high levels of free cash flow mean dividend safety concerns are minimal.
In addition, Altria’s current yield is massive at 7.2%, roughly six times that of the broader market.
Universal Corporation (UVV)
Our final stock is Universal Corporation, a processor and supplier of leaf tobacco and plant-based ingredients globally. The majority of Universal’s business is the distribution of tobacco leaf, but it also has a sizable ingredient business serving food and beverage makers with various products.
Universal was founded in 1886, generates about $2 billion in annual revenue, and trades with a market capitalization of $1.3 billion.
Universal released full-year earnings on May 26, 2021, and results were somewhat weak against the year-ago period. The company reported revenue of $620 million during the fourth quarter, which was about 2% lower than the comparable period a year ago. Leaf tobacco volumes fell slightly year-over-year, and the third quarter had demand pulled forward and inflated results for that period.
Earnings-per-share totaled $2.15 in Q4, well ahead of the $1.58 produced in the prior year’s Q4. Universal said it would see higher earnings-per-share for this year, so we predict $4.35 in earnings-per-share, which would be slightly ahead of the $4.25 produced in the prior year.
Universal has a truly outstanding dividend history, having boosted its payout for 50 consecutive years, and qualifying it for the coveted title of Dividend King. Universal’s earnings growth has been muted in recent years, but it continues to generate substantial free cash flows that it returns to shareholders. Universal’s current yield is huge at 6%.
We see the payout ratio at just 72% for this year, meaning the dividend should be able to be raised 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 earnings-per-share rising at a low single-digit rate for the foreseeable future.
On the date of publication, Bob Ciura did not have (either directly or indirectly) positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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.