24/7 Wall St. » Tobacco

The Market Where Defensive Shares Are Working Again (PEP, KO, BUD, TAP, AWK, MCD, KFT, CAG, CPB, HRL, MO, VGR, RAI, PG, KMB, CL, MRK, PFE, JNJ, T, VZ)

Administrator — Tue, 08 May 2012 16:07:03 +0000

Blame whatever you want. A weaker U.S. economy, a weakening and flailing Europe, a move to socialism in France and Greece, a weaker BRIC and emerging market story, commodity prices and on and on… Commodity prices and their tracking shares are getting hosed today. Why does the “Sell in May and go away!” profile often coincide with sell-offs so well?

After the weakness in the broad market has the DJIA down 140 points (or -1.1%) and the S&P 500 Index down 15 points or 1.1%, it turns out that most of the defensive stock sector leaders are holding up far better than the broad market in our go-to defensive stock portfolio. We have taken a look at each of these with share price snapshots right before Noon EST.

No matter what, you gotta drink! Pepsico, Inc. (NYSE: PEP) is down 0.5% at $66.28 against a 52-week high of $71.89; Coca-Cola Company (NYSE: KO) is down 0.4% at $76.97 against a 52-week high of $77.82. With yields of about 3% on average, these are now challenging the 30-Year Treasury yields. The beer segment is not acting defensive as it should, perhaps because they are foreign issues now with more currency risks: Anheuser-Busch InBev SA (NYSE: BUD) and Molson Coors Brewing Company (NYSE: TAP) are not acting very defensive with price corrections of 3% and 2$ respectively.

Perhaps the most defensive you can get is water, and the top water utility is American Water Works Company, Inc. (NYSE: AWK) with a premium valuation. This water leader is down 0.8% at $33.73 against a 52-week and all-time high of $34.89.

Food is supposed to be defensive, although a drop of 1.5% in McDonald’s Corporation (NYSE: MCD) to $94.10 is causing some added stress in what was the darling of the DJIA in 2011. The rest of the defensive food segment seems to be less damaged when you evaluate the moves: Kraft Foods Inc. (NYSE: KFT) is down only 0.4% at $39.11; ConAgra Foods, Inc. (NYSE: CAG) is down 0.7% at $25.52; Campbell Soup Co. (NYSE: CPB) is down only 0.3% at $33.97; and Hormel Foods Corporation (NYSE: HRL) is down only 1 penny at $28.92 as the world is getting excited about Spam again.

Smoking is defensive again and the tobacco stocks are holding up much better than the broad market with those 5% and higher dividends: Altria Group Inc. (NYSE: MO) is down only $0.3% at $32.10 against a 52-week high of $32.62; Vector Group Ltd. (NYSE: VGR) is down only 0.2% at $16.88; and Reynolds American Inc. (NYSE: RAI) is down only 0.2% at $40.18 against a high of $42.81.

Shaving, diapers, toilet paper, and other consumer products are acting defensive with some gains on a weak day. Procter & Gamble Co. (NYSE: PG) is trading up $0.11 at $64.36 and Kimberly-Clark Corporation (NYSE: KMB) is up $0.08 at $79.08 with KMB challenging the 52-week high. Colgate-Palmolive Co. (NYSE: CL) is down ‘only’ 0.5% at $99.10 against a 52-week high of $100.81.

Drug and medical is holding up on the consumer end with losses look far less than the broader market: Merck & Co. Inc. (NYSE: MRK) is down 0.35% at $38.40; Pfizer Inc. (NYSE: PFE) is down 0.3% at $22.38; and Johnson & Johnson (NYSE: JNJ) is down the least with a drop of 0.2% at $64.65 against a 52-week high of $68.05.

Those smartphones and telephones are somewhat defensive, and those 5%-plus yields sure shield investors who are worried about chasing the hottest growth stocks. Verizon Communications Inc. (NYSE: VZ) is down only 1-penny at $40.52 with a 5% dividend yield and AT&T, Inc. (NYSE: T) is actually up 0.2% at $33.08 with a yield of about 5.4%.

When investors want safety and when the Treasury yield is so low on the longer-term Treasury market, many investors turn to the safety of the higher dividends and safer stocks that are defensive. Greece and the rest of PIIGS may fall again, but the logic is that U.S. consumers still have to eat, drink, shave, put on deodorant, and tend to stick with their core vices as best as they can.

JON C. OGG

Filed under: Consumer Goods, Defensive Stocks, Dividend, Drug companies, Food, Telecom, Tobacco Tagged: AWK, BUD, CAG, CL, CPB, HRL, JNJ, KFT, KMB, KO, MCD, MO, MRK, PEP, PFE, PG, RAI, T, TAP, VGR, VZ

Altria Doesn’t Light it Up (MO, RAI, LO, PM)

Paul Ausick — Thu, 26 Apr 2012 11:43:15 +0000

Altria Group Inc. (NYSE: MO), the maker of Marlboro cigarettes and other products, reported earnings this morning that did not match expectations. The consensus estimate for EPS was $0.49 and the revenue estimate came in at $4.01 billion. Last year the company posted EPS of $0.44 on revenue of $3.94 in its first quarter.

Adjusted EPS came in at $0.49, right on the estimate, but revenue of $3.98 billion was low. Total sales came in at $5.1 billion, but tobacco-related settlement charges are backed out. Earlier this week Reynolds American Inc. (NYSE: RAI) and Lorillard Inc. (NYSE: LO) reported soft earnings for the quarter. Only Altria’s sister company, Philip Morris International Inc. (NYSE: PM) beat earnings estimates in the first quarter.

Altria, which also owns about 27% of brewing giant SABMiller, did not get any help from beer sales in the quarter. In all, SABMiller contributed $0.01 to Altria’s adjusted EPS.

And as with Reynolds and Lorillard, cigarette sales volume was down — in Altria’s case -2.5%. (Yes, we know the joke.) Marketing and promotional costs were also higher. Net revenues were down -0.8% year-over-year although operating margins rose 1.5% to 41%.

The company reaffirmed full-year adjusted EPS guidance of $2.17-$2.23. The consensus estimate is $2.20. In the first quarter, share buybacks totaled about $294 million and the company has approximately $378 million remaining of its authorized $1 billion share buyback program. Altria boasts a dividend yield of 5.1%, paying an annual dividend of $1.64/share.

Shares of Altria are up 0.35% in the pre-market at $31.80 in a 52-week range of $23.20-$32.10.

Paul Ausick

Filed under: Consumer Goods, Earnings, Tobacco Tagged: LO, MO, PM, RAI

Alternative Investing: Two T206 Honus Wagner Cards For Sale In Same Month (CLCT, EBAY, MSFT, AAPL)

Administrator — Mon, 30 Jan 2012 17:18:23 +0000

Almost all investments rise and fall in price through time, and the same is true over the value of sports collectibles and baseball cards. The ‘investing’ rule in sports collectibles that has been true through good times and bad times is fairly simple: vintage collectibles of high quality tend to dominate over the mass-produced items from the 1980s all the way up to modern day. Almost everyone has heard of the great baseball players of the game such as Babe Ruth, Lou Gehrig, Ty Cobb, Mickey Mantle, and Hank Aaron. Very few people know much about Honus Wagner as a baseball player. The difference is that most collectors (and collectible investors) know one thing for sure… The T206 Honus Wagner is the most desired sports collectible that exists.

January 2012 is the first time in memory that two different samples of the T206 Wagner card have been for sale in the same month. If you have nearly unlimited means, a T206 Wagner can end up in your collection right now. Another T206 Wagner just sold in early January.

Published reports indicate that there may be 50 to 100 samples of the T206 Honus Wagner that exist, but there may only be around 50 in existence after speaking with industry sources. A sale of $2.8 million for the “Wayne Gretzky” T206 Honus Wagner in 2007 set a record, and that was after the exact same card had been bought for about $2.35 million earlier that same year.

The reason this card is so rare is known as Honus Wagner decided to have the American Tobacco Company withdraw his card from the T206 series. The “why” this card is so rare remains a debate even today. Only a limited number of this card made it out into the public, or at least only a few which are known to have survived. In the late 1800s and early 1900s, baseball cards were promotional inserts for cigarettes packs and tobacco packages, as well as made for other products. They were far from being kids’ bubble gum cards that later generations would come to cherish.

The most common belief is that Wagner was anti-tobacco and did not want his image promoting cigarettes and tobacco products to children. Maybe, but Maybe not. This may have simply been a contract dispute over compensation or terms. Here is the argument for the latter case… Honus Wagner’s image appeared on cigar boxes in some of the same years around the debated time of 1909 to 1911 when the T206 cards were distributed. Robert Edwards Auctions has auctioned two such cigar boxes in recent years, and the Baseball Almanac shows these images as well.

While most baseball cards rise and fall in value and can be very cyclical, that just has not been the case for a T206 Honus Wagner. As it turns out, there are millions of people who collect baseball cards and memorabilia or who have collected in their lives. The Wall Street Journal reported in mid-2011 that there were 3.1 million millionaires in 2010. And the same report showed over 40,000 in North America worth $30 million or more. Some of these people are still collectors and there is no greater prize in sports collecting than being able to flaunt a T206 Wagner.

It was not very well covered in the media, but a T206 Honus Wagner from the famed Dreier collection just sold in early January 2012 through Legendary Auctions. It was graded by PSA, one of the industry-recognized grading services and the grading brand of Collectors Universe, Inc. (NASDAQ: CLCT). It was graded as a “4″ (on a scale of 1 to 10). This famed T206 Wagner sold for an undisclosed sum. After speaking with Doug Allen of Legendary, it was a privately negotiated transaction. Mr. Allen would not disclose the buyer nor could we get an exact price, but he quoted, “The sale was for more than $1.5 million.” An incredible sum indeed.

Now there is another sample of the card for sale right now, for a hefty price. Memory Lane has a “PSA 2″ graded T206 Wagner for sale today for a whopping $775,000.00. It is even advertised on eBay Inc. (NASDAQ: EBAY) as item #290661465614. After speaking with J. P. Cohen of Memory Lane, this is card is on consignment and had previously been for sale at a higher price and the new price is said to be close to where offers came in for this exact card last year.

These two samples are not the only T206 Honus Wagner cards which have been sold in recent times. A unique sample was a proof strip from the T206 set which actually belonged to Honus Wagner himself. This was purchased at the Major League Baseball All-Star Auction by SCP Auctions (for an anonymous client) for the sum of $316,250 in 2010. It was also SCP Auctions Inc. which brokered the record $2.8 million sale mentioned earlier of the prized Gretzky T206 Wagner.

Filed under: 24/7 Wall St. Wire, Compensation, Cult Stock, Economy, Editor's Picks, Entertainment, Luxury, Mergers and Buy Outs, Personal Finance, Private Equity, Special Report, Tobacco, Value Investing Tagged: AAPL, CLCT, EBAY, MSFT

Marlboro Country Getting Smaller (MO)

Paul Ausick — Fri, 27 Jan 2012 14:11:52 +0000

Altria Group Inc. (NYSE: MO), makers of Marlboro cigarettes and many other branded tobacco products, reported fourth quarter earnings this morning. Adjusted EPS came in at $0.50, a penny better than estimates. Revenue totaled $4.34 billion, also above the consensus estimate of $4.23 billion.

Net income for the quarter was down by -9% year-over-year at $836 million compared with $919 million in the same quarter a year ago. Earnings were boosted by the company’s cost cutting, which met a $1.5 billion reduction goal in the third quarter of 2011. The company is looking for an additional $400 million cuts by the end of 2013.

The company’s market share fell -0.7% to 41.6% of the total US market.

Altria announced the retirement of the company’s chairman and CEO, effective in May. The new chairman and CEO will be Martin Barrington, a 19-year veteran of the company.

The company’s 2012 guidance calls for full-year EPS of $2.14-$2.20, not including a $0.03/share adjustment. Analysts had a consensus estimate of $2.19. EPS for 2011 totaled $2.05 on an adjusted basis, slightly higher than the consensus estimate of $2.03.

Altria repurchased $1.3 billion in stock in 2011, out of $2 billion authorized in two repurchase programs. The company expects to complete the authorized repurchase program by the end of this year. Altria pays an annual dividend of $1.64/share, for a dividend yield of 5.7%.

Shares are trading higher by about 1.2% in the pre-market this morning, at $29.00 in a 52-week range of $23.20-$30.40.

Paul Ausick

Filed under: 24/7 Wall St. Wire, Earnings, Tobacco Tagged: MO

Eight Industries the U.S. Has Lost to China

Charles B. Stockdale — Tue, 24 Jan 2012 11:44:20 +0000

Americans are used to the U.S. being the leader, or a top-ranked nation, in many areas. But in a number of industries and businesses, the U.S. has lost that first place, usually to China. While some, such as coal production, may not come as a surprise, other industries where the U.S. has lost market leadership might. 24/7 Wall St. looked at a large number of manufacturing, agricultural and financial businesses to find those in which China has surpassed the U.S.

Read: The Eight Industries the U.S Has Lost to China

For several years, economists have said that China’s GDP growth indicates that its economy will pass that of the U.S. in the next two or three decades. China’s GDP is measured at about $6.5 trillion, now second in the world. America’s GDP is over $15.2 trillion, according to the International Monetary Fund. While China certainly has much catching up to do, the two countries’ rate of GDP growth is also very different. Last year, China’s economy expanded at more than 9%. America’s GDP grew at a little better than 2%.

One reason that China continues to gain so rapidly on the U.S. is the high cost of American labor and manufacturing. In fact, U.S. manufacturing costs have risen so much that they are much higher than in any developed nation with factory capacity. This includes countries like China, Mexico and South Korea — places the U.S. and Japanese companies often contract to do their factory work. The labor price advantage has helped China become the largest steel producer in the world. China is also first place in car manufacturing.

Low labor costs are not the sole reason China has become the single largest provider of many goods. China’s 1.3 billion citizens have become voracious consumers as workers in its manufacturing sector have grown the number of its middle class. China also has decided that it is often financially better to provide its own raw material for its factories — items like cotton — than it is to import such items from overseas.

24/7 Wall St. examined the manufacturing, agricultural and financial businesses in which China has surpassed the U.S. China likely will become the world’s largest economy based on GDP. It certainly has shown that it has the capacity to advance on that position — one large industry at a time.

Filed under: Economy, IPOs, Special Report, Tobacco Tagged: GM, HMC, TM

The 24/7 Wall St. 2012 Model Dividend Portfolio (AEP, AWK, T, GE, GOV, KMB, SNH, WMT, JNK, AMJ, AMLP, PGF, MO, DLR, EPD, KMP)

Administrator — Thu, 05 Jan 2012 19:41:33 +0000

It seems that most investors have started adding income or dividend reinvestment plans to their portfolios by using dividend stocks. With the yields of the 10-Year Treasury close to 2% and the 30-Year Treasury close to 3%, investors are looking elsewhere for investment income. 24/7 Wall St. has compiled its own 2012 Model Dividend Portfolio. It has some new names and some deletions from prior dividend lists due to price appreciation or fundamental changes.

It turns out that many stocks with high dividend yields are now more attractive than sovereign debt in the U.S. and abroad. Part of the allure, besides income or reinvestment, is that dividend stocks often hold up better than other investments during jittery markets. It is hard to imagine, but the high-yield utility sector was one of the top performers of the S&P in 2011. In some cases, half of an investor’s total return through time may come from dividends. Warren Buffett generally picks dividend-paying companies for Berkshire Hathaway Inc. (NYSE: BRK-A) after following some of the principles of Benjamin Graham.

The 24/7 Wall St. 2012 Model Dividend Portfolio includes the following stocks: American Electric Power Co., Inc. (NYSE: AEP); American Water Works Company, Inc. (NYSE: AWK); AT&T, Inc. (NYSE: T); General Electric Co. (NYSE: GE); Government Properties Income Trust (NYSE: GOV); Kimberly-Clark Corporation (NYSE: KMB); Senior Housing Properties Trust (NYSE: SNH); and Wal-Mart Stores Inc. (NYSE: WMT).

While exchange-traded products have been avoided in the past, recent trends merit a look at the open-end or closed-end mutual funds and ETF products as follows: SPDR Barclays Capital High Yield Bond (NYSE: JNK); JPMorgan Alerian MLP Index ETN (NYSE: AMJ); ALPS Alerian MLP ETF (NYSE: AMLP); and PowerShares Financial Preferred (NYSE: PGF).

Lastly, there have been some exits due to upside price performance: Altria Group Inc. (NYSE: MO); Digital Realty Trust Inc. (NYSE: DLR); Enterprise Products Partners LP (NYSE: EPD); and Kinder Morgan Energy Partners LP (NYSE: KMP).

We have described the features and outlook for each component of our Model Dividend Portfolio.

Filed under: Bonds, Compensation, Conglomerates, Corporate Governance, Dividend, Editor's Picks, ETF, Mutual Funds, Oil & Gas, Shareholder Issues, Special Report, Stock Buybacks, Tax, Tobacco, Utilities, Value Investing Tagged: AEP, AMJ, AMLP, AWK, BAC, BRK-A, DLR, EPD, GE, GOV, HBC, INTC, JNK, JPM, KMB, KMP, MET, MO, PGF, SNH, T, VZ, WFC, WMT

Investors Quit Smoking As 2012 New Year Resolution (MO, LO, RAI, PM)

Administrator — Tue, 03 Jan 2012 13:59:00 +0000

It was not that long ago that Altria Group Inc. (NYSE: MO) was removed from our 2012 Model Dividend Portfolio. Our take was that the metrics of the domestic tobacco industry were changing to where the only way that earnings can grow is if cigarette companies start raising prices at a faster pace than the case volumes are falling. This is the only way that Altria and other can grow that dividend. We may be early by a year, but the reality is that we would not become excited about Altria unless shares were to come back down to $27 or even $26 before giving it a visitation again.

We did not substitute Reynolds American Inc. (NYSE: RAI) nor Lorillard, Inc. (NYSE: LO) for Altria in the dividend portfolio because of the industry woes being present. As far as Philip Morris International, Inc. (NYSE: PM), it has other issues like currencies to deal with, as well as having a lower dividend rate and even some nations increasing their legal actions against tobacco.

apparently Barron’s feels the same in the concerns. We expected the cover story this last weekend to be about all of the outlooks for a better 2012 or something more broad. Instead, the cover story was “Up In Smoke” with the note that Altria’s prospects are low with the cigarette sector outlook being bad and with Marlboro losing market share as cheaper brands are winning out.

Barron’s take… Altria could fall 15%, and with shares having been around $30.00 that could take the stock back under $26.00.

Altria shares are trading down 3.3% at $28.67 after a $29.65 close on Friday. Apparently investors are giving up on smoking for a new year resolution as well.

If you want to gain access to the 2012 Model Dividend Portfolio, simply sign up in the box below for our morning email list to hear about analyst upgrades and downgrades, moves from Warren Buffett and other top gurus, and other key features from the 24/7 Wall St. staff.

JON C. OGG

Filed under: Consumer Goods, Corporate Governance, Dividend, Shareholder Issues, Tobacco Tagged: LO, MO, PM, RAI

Investors Risk Chasing Yield Too Much In Tobacco Dividends (MO, T, RAI, LO, PM)

Administrator — Wed, 21 Dec 2011 19:01:48 +0000

The continued rise in tobacco stocks is certainly cheered by tobacco stock investors who own the stocks for the high dividends. The problem is that there seems to be a phantom premium now being built into tobacco stocks for new investors buying now. It is starting to look and feel a lot like investors are in a classic “chasing yield” strategy right now.

Altria Group Inc. (NYSE: MO) has now hit a new adjusted high and shares have even crossed above the $30.00 threshold. When we recently questioned how safe these tobacco dividends were earlier in December, Altria shares were around $28.65. When we eliminated the tobacco sector from our 24/7 Wall St. 2012 Model Dividend Portfolio, the admission was that it might be a tad soon but that the share price was getting ahead of the underlying fundamentals.

Our take is that Altria would become very attractive again if it was to get closer to $25.00. Admittedly, that might be closer to $26.50 now that investors have proven willing to invest in Altria above $30.00. Altria’s 5.6% yield now compares to a dividend yield north of 6% for telecom giant AT&T Inc. (NYSE: T).

The tobacco sector is still a safe haven to hide in during market sell-offs, but the longer-term risk/reward is reaching above our parameters for investors with a 5-year or longer horizon.

We have not added Reynolds American Inc. (NYSE: RAI) nor Lorillard Inc. (NYSE: LO) as replacement stocks for Altria in the Model Dividend Portfolio. Again, if the share prices come back down then our interest may increase. The good news is that Philip Morris International, Inc. (NYSE: PM) still has a safe dividend and it has plenty of income coverage to hike in the future. The international tobacco play has “only” a 4.1% dividend yield and it has extreme currency risks. The last hike was a large one from $0.64 to $0.77, and even if the company made the sale nominal jump to $0.90 per quarter it would be paying out less than 70% of its expected income per share.

Our belief is that the domestic tobacco market has too many headwinds in the future, but none of the threats are legal cases. The biggest fear is that Joe Public has finally made a healthier move and more smokers are dropping out of the population. Some die, but some quit.

Over the last month we have read about price hikes being passed down to distributors. After all, it isn’t really as if the stores can substitute out Joe Camel for the Marlborough man or vice versa. Lorillard was shown to be passing on a $0.06 per pack hike, while a nickel hike was coming from Altria and Reynolds. What if the government or distributors argue that there is price collusion happening? Too many price hikes may eventually at some point drive away more smokers. States, cities, and counties keep turning to tobacco sales for higher taxes as well.

Investors should be at least concerned that the only way to grow earnings is by price hikes to keep juicing up the dividends. Case volumes keep shrinking and operating costs and tobacco crop prices ultimately can only be cut so much. There are only so many ways to diversify for growth as well. Smokeless tobacco has been one push, and the non-tobacco “e-cigs” are another…

We still maintain that the endless tobacco dividend hike game is yet entirely over. At the current pace, we could easily see one more annual dividend hike or maybe even two. Altria’s quarterly dividend went from $0.38 to $0.41, Reynolds went from $0.53 to $0.56, and Lorillard has now had four quarters of a $1.30 payout. These dividends are now all under 6% because the share prices have risen enough.

When we eliminated tobacco from the 2012 Model Dividend Portfolio, we noted, “Our admission is a simple and humble one: we may be too early on this call. You have been hearing about the death of the tobacco industry for years.” Tobacco is here today and will still be here tomorrow.

The biggest fear for investors is that some time in the next year or two it could be the time that one of the tobacco giants says “We cannot afford to hike our dividend this year, but we hope to next year.” If investors ever fear that to be the case, then that will mark the end of the tobacco run.

Except for Lorillard, the stocks are above the consensus analyst price targets: Altria’s target is $29.00 with a share price above $30.00 and Reynolds American’s share price is $41.71 versus a target price of $40.75.

If you want to receive the full 24/7 Wall St. 2012 Model Dividend Portfolio you can sign up in the email submission below. Each morning we send our free email list subscribers a snapshot of the key feature stories, the top daily analyst upgrades and downgrades, previews for key events, and many other aspects governing your finances.

JON C. OGG

Filed under: Dividend, Tobacco Tagged: LO, MO, PM, RAI, T

Are Tobacco Dividends Still Safe Beyond 2012 and 2013? (MO, RAI, LO, PM)

Administrator — Fri, 09 Dec 2011 19:21:58 +0000

24/7 Wall St. has just released its 2012 Model Dividend Portfolio for investors. While we have many names we have featured as buys in our income and defensive stock sectors, this is the first time in quite some time that we have eliminated tobacco stocks from the mix. They are still safe sectors to hide in during market sell-offs, but the risk/reward is reaching above our parameters for the investors with a 5-year or longer horizon.

The move takes of Altria Group Inc. (NYSE: MO) from the mix, and frankly we are not even adding Reynolds American Inc. (NYSE: RAI) nor Lorillard Inc. (NYSE: LO) currently. The moves would easily be remedied if these share prices correct, but our belief is that the domestic tobacco market has too many headwinds in the future. The good news is that none of them are legal. It is a healthier move as more smokers are dropping out of the population, either by death or by the more preferable method of realizing that continuing to smoke will cause death.

Dow Jones gave some figures that show pricing power this morning, but some could perhaps argue that this is the industry banding together. Lorillard was shown to be passing on a $0.06 per pack hike, while a nickel hike was coming from Altria and Reynolds. Frankly, this price hike in our belief is only going to drive away that many more smokers even if it is just a marginal hike. That hike, and then some, will be passed on to Joe Public. States, cities, and counties keep turning to tobacco sales for higher taxes as well.

Price hikes are now the only way that tobacco companies can grow earnings and cash flow enough to allow for higher dividends and continued share buybacks. Case volumes keep shrinking and costs ultimately can only be cut so much. We also still wonder about the risks of the nasty labels, even if that now appears to not be as large of an issue ahead right now.

So, our take is not that the dividend game is yet entirely over. At the current pace, we could see one more dividend hike. Maybe two. Altria’s quarterly dividend went from $0.38 to $0.41, Reynolds went from $0.53 to $0.56, and Lorillard has now had four quarters of a $1.30 payout. These dividends are now all under 6%.

We do not see a jeopardy of these being in the defensive stock category for traders, but the stock prices have just risen too far for us to recommend these for long-term dividend investors. Our admission is a simple and humble one: we may be too early on this call. You have been hearing about the death of the tobacco industry for years.

Still, what happens the year that one of the tobacco giants says “We cannot afford to hike our dividend this year, but we hope to next year.” That will be the end. These tobacco stocks, except for Lorillard, are just too close to their consensus price targets as well.

The good news is that Philip Morris International, Inc. (NYSE: PM) still has a safe dividend and it has plenty of income coverage to hike in the future.

Lastly, we are not full of panic here. If Altria came back closer to $25.00 or if Reynolds reach back down to $35.00 or so, the we would not hesitate a reconsideration. We have just seen these shares rise and rise and the yield opportunities are better elsewhere.

JON C. OGG

Filed under: Dividend, Regulation, Tax, Tobacco Tagged: LO, MO, PM, RAI

Tobacco Company Dividends Hold Investors in Line (LO, MO, RAI, PM, VGR)

Paul Ausick — Mon, 24 Oct 2011 14:45:43 +0000

Some of the highest dividend yields from any sector come from tobacco stocks. That’s why a relatively weak report from one of the cigarette makers gives pause to investors looking for a safe place to make some profits. Today’s report from Lorillard, Inc. (NYSE: LO) was, in fact, one of those weak reports and the question is whether weak earnings will dampen enthusiasm for this high-dividend sector.

Lorillard, with a market cap of around $16 billion, trails Philip Morris International Inc. (NYSE: PM), Altria Group, Inc. (NYSE: MO), and Reynolds American, Inc. (NYSE: RAI) among US tobacco companies. It is, however, substantially larger than budget cigarette-maker VGR Group Ltd. (NYSE: VGR). In terms of dividend yield, though, VGR currently pays 9.10%, compared with 6% at Altria, 5.3% at Reynolds, 4.5% at Lorillard, and 4.4% at Philip Morris.

Lorillard’s introduced a non-menthol Newport product during the quarter, in an effort to extend its best-selling Newport menthol cigarettes and also saw solid retail sales growth in its low-priced Maverick brand. But the lukewarm results are a function of lower wholesale sales even though retail sales improved. The company also got hit with higher costs related to litigation settlement agreements and federal requirements.

The company posted EPS of $1.94 on revenue of $1.62 billion. The consensus estimate called for EPS of $2.03 on $1.14 billion. Gross profit fell year-over-year from 36.1% to 34.7%. To make up for the profit shortfall, the company announced a new $750 million share buyback following a $1.4 billion buyback that was completed in August. The company has about $550 million remaining in the new share repurchase program.

In the first 45 minutes of trading this morning, Lorillard’s shares are down about -4.9%, and while volume is heavier than usual, it is not dazzlingly so. The company’s average daily volume is just less than 2 million shares out of more than 138 million shares outstanding. Almost 97% of the shares are held by institutional investors, who are quite happy with the stock’s yield and less interested in a rising share price. By way of comparison, institutional investors hold about 71% of Philip Morris shares, about 61% of Altria shares, about 46% of Reynolds’ shares, and just under 28% of VGR’s shares.

Given the relatively low turnover in Lorillard’s shares today, one might reasonably conclude that the institutional investors are still satisfied with the dividend and with the company’s new share repurchase program. For institutional investors, tobacco companies’ high dividends are worth holding on for.

With the exception of Philip Morris, the other tobacco company stocks are trading lower today as well, though volumes are not out of the ordinary. Philip Morris shares are up a bit — 0.10% — likely due to a strong report from India’s ITC Ltd., the largest cigarette maker in that country.

Lorillard’s shares are off -4.9%, at $109.98, in a 52-week range of $72.40-$120.00. Altria’s shares are off -0.55%, at $27.30, in a 52-week range of $23.20-$28.14. Reynolds American shares are off -1.66%, at $39.07, in a 52-week range of $19.50-$39.77. VGR shares are off -0.74%, at $17.39, in a 52-week range of $15.37-$19.28.

Paul Ausick

Filed under: Dividend, Earnings, Tobacco Tagged: LO, MO, PM, RAI, VGR