2 Tobacco Mid-Caps Compared to Philip Morris

Published Tue, 08 Sep 2015 12:30 CET by DividendYields.org

Small- and mid-caps are turning into important dividend payers. For investors with a long-term horizon and willing to undertake a certain level of risk (mainly to leverage market volatility), indexes like the Russell 2000 might be a good choice for higher growth. Furthermore, it’s no secret that small- and mid-caps often outperform their large-cap peers by achieving higher returns, leaving more room for higher dividends. Indeed, 324 of the 600 companies in the Russell 2000 index pay out a dividend, according to S&P Dow Jones Indices. This accounts for over 50% of the companies in the small cap index.
This article compares two mid-cap stocks trading in the consumer goods sector of the tobacco industry to Philip Morris. Both mid-caps have outperformed Philip Morris with better YoY returns and increased profitability.

Philip Morris, Universal and Vector Group Stock Performance Year over Year Graph
Philip Morris International (NYSE: PM), the New York-based leading tobacco company, has a big portfolio of brands of cigarettes, tobacco products and nicotine-related products, which are manufactured and sold around the world. PM’s negative D/E ratio (the debt/equity ratio is a metric that illustrates the capital structure of a company) is attributed to negative retained earnings as a result of a three-year share buyback program of $18 billion since August 2012. Having reinvested retained earnings in the company, PM resulted in negative shareholder equity, which produced a negative D/E ratio. A headwind for PM is the imposition of the EU directive for tobacco products by May 2016, which will create a new legislative framework in each European market related to the internal market for tobacco and related products. On the upside, the underlying business performance is reflected to YoY net change in cash & cash equivalents in Q2 2015 ($156 million from minus 613 million in 2014) as a result of a stronger pricing policy in the EU, where PM has a market share of 40%. Additionally, the launch of innovative products, Marlboro 2.0 in the EEMA markets and iQOS (e-cigarette) in selected global markets, is expected to further secure PM’s positioning and increase shareholder value. Consensus EPS forecast is $4.79 up to 2017 (current EPS $4.78) and an average annual growth of 10.0% over the next five years. A beta of 1.11 indicates a relatively risky investment. The high payout ratio is justified by annualized dividend $4 and retained earnings.

Universal Corporation (NYSE: UVV) is a leaf tobacco merchant, which procures, finances, processes, packs, stores and ships leaf tobacco to manufacturers of consumer tobacco products globally. Q1 2016 results of the Virginia-based company (fiscal year is on March) report 1.44% YoY revenue growth ($275.4 million from $271.5 in 2015) as a result of lower grain prices. Although UVV expects increased supply for certain tobacco qualities going forward, its business is affected by seasonal factors related to weather conditions, timing of shipments, forex changes, sourcing complexity and changes in the global political and economic environment. For the moment, expectations for Q2 2016 are in line, considering the seasonality trend, and therefore UVV anticipates an increased level of sales volume for 2016. The D/E ratio is well below 2, suggesting that UVV is not facing debt management issues. The low payout ratio is the result of an EPS of $3.57 and although there is no estimate for EPS going forward, UVV is expected to continue monitoring new growth opportunities globally with the aim to improve operational efficiency. A beta of 1.21 suggests a relatively safe investment, yet seasonality should be taken into account.

Name Price ($) 52 wk low 52 wk high 52 wk low % 52 wk high % Market Cap ($ b) P/E D/E Beta Payout Ratio
Philip Morris 77.29 75.27 90.25 2.68% -14.36% 119.70 16.17 -2.28 1.11 84%
Universal 48.65 38.30 58.89 27.02% -17.39% 1.10 13.61 0.39 1.21 58%
Vector Group 24.01 19.72 25.87 21.75% -7.19% 2.81 41.40 -22.47 0.72 276%

Vector Group (NYSE: VGR) engages in the manufacture and sale of cigarettes in the U.S through its subsidiaries Liggett Group and Vector Tobacco. The stock’s strong performance (+5.53% return YoY) is further sustained by 18% YoY growth in operating income, which is a key breakthrough, considering the oligopoly structure of the tobacco industry. Additionally, VGR’s strategic pricing and the elimination of the tobacco quota buyout program has led to YoY earnings growth 125.49% ($17.34 million from $7.49 in Q2 2014). The company’s negative D/E ratio is due to negative shareholder equity as a result of negative retained earnings. Yet, this is justified as tobacco is a growth-oriented industry and tobacco companies tend to retain more earnings. A low EPS of $0.58 produces a high payout ratio, but the company is aiming to continue assessing new opportunities to build long-term shareholder value. Consensus EPS forecast is $0.79 and an annual growth rate of 8.4% up to 2016. A beta of 0.72 indicates a safe investment.


Stock name Dividend Yield
Vector Group 13.44
Universal 5.77
Philip Morris International 5.36

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