Are Big Tobacco's Dividend and Earnings Plans Too Rosy?


Altria Group Inc. (NYSE: MO) shareholders have enjoyed a steady stream of higher and higher dividends through time. The question that needs to be asked now is if those returns can be sustained in an America where new smokers are fewer and where case volumes have been on the decline. With the recent sell-off from the peak in recent months, it seems that some of the selling was due to a dividend bubble. But some of this selling has to be that investors are wondering if the peak of the tobacco trade is forming.

Altria's goal is to grow its adjusted diluted earnings per share (EPS) at an average annual rate of 7% to 9% over time. They also have an objective to return 80% of their adjusted diluted EPS to shareholders through dividends. The company aims to achieve these goals on a consistent basis over the long term and manage their businesses accordingly.

Marty Barrington, Altria's chairman and CEO, is speaking at the Morgan Stanley Global Consumer Conference this Tuesday, and he is trying to maintain that Altria's targets are to keep delivering the same sort of earnings growth and payout rates.

Barrington said:

Altria has delivered excellent total returns to shareholders by focusing on these objectives. Altria grew its adjusted diluted EPS at a compounded annual rate of 7.9% from 2007 through 2011. We paid shareholders $13.5 billion in dividends and returned more than $3.1 billion in additional cash through share repurchases from the time of the spin-off of Philip Morris International Inc. (NYSE: PM) in early 2008 through October 2012. Altria's total shareholder return has outperformed the S&P 500 Index each year since the PMI spin-off, extending a track record of outperformance that has now run for 12 straight years through 2011. Through November 9th of this year, Altria has delivered a double digit total shareholder return of 10.4% versus the 11.8% return of the S&P 500 Index. Altria also grew its adjusted diluted EPS 7.8% through the first nine months of this year.

Altria is targeting 2012 earnings per share growth of 7% to 9%. More importantly, the company stated its goal of growing adjusted diluted earnings per share at an average annual rate of 7% to 9% over time. Altria also is maintaining an objective to return 80% of its adjusted diluted earnings per share to shareholders through dividends.

Altria closed at $31.10 on Monday and the 52-week range is $27.00 to $36.29 and its dividend yield is back up to about 5.6% due to the recent sell-off seen in the stock. Thomson Reuters still has a consensus price target up around $36 as analysts raised its target over and over as the rally went up from $29 to $31 to $34 and ultimately more than $36 before shares came back to reality.

Another bit of news came out in the tobacco sector today that is along the lines of dividends and shareholder implications. Lorillard, Inc. (NYSE: LO), which also has a dividend of close to 5.6%, declared a 3-for-1 stock split. At $112.59, its 52-week range is $106.64 to $141.07.

After looking at the performance and the drop from the peak, these tobacco stocks have sold off significantly. Lorillard is down 20.2% from its peak, and the losses from the peak for Altria and Philip Morris International are down 14.3% and 9.7%, respectively.


Filed under: 24/7 Wall St. Wire, Consumer Product, Dividends & Buybacks, Tobacco Tagged: featured, LO, MO, PM