Tuesday, January 22, 2019

Seven Dividend Growth Stocks Rewarding Shareholders With a Raise

I review the list of dividend increases every week, as part of my monitoring process. This exercise helps me to check up on existing holdings and to identify companies for my watch list.

Last week, there were seven dividend growth stocks that raised dividends to shareholders. Each one of those companies has at least a ten year track record of annual dividend increases. Since dividends are paid out of earnings, these dividend achievers couldn’t have compiled such a record without having enjoyed consistent success in their core business, whatever it is. So you’re looking at a group of profitable enterprises with staying power.

I review the increase relative to the dividend record, along with valuation and track record. The companies included:

Realty Income (O), The Monthly Dividend Company is an S&P 500 company dedicated to providing stockholders with dependable monthly income. The company is structured as a REIT, and its monthly dividends are supported by the cash flow from over 5,600 real estate properties owned under long-term lease agreements with regional and national commercial tenants.

The REIT raised its monthly dividend to 22.55 cents/share, which represents a 3% increase over the distributions paid during the same time last year. This is the 100th dividend increase since Realty Income's listing on the NYSE in 1994. 



During the past decade, Realty Income has managed to boost dividends at an annual rate of 4.40%/year.

Between 2008 and 2017, FFO/share grew from $1.83 to $2.82. Realty Income is expecting to generate FFO/share in the $3.11 - $3.14 range in 2018.

I like Realty Income, but so do a lot of other REIT investors. As a result, it is offering a 4.20% yield and is selling at 20.80 times forward FFO. The REIT is managed well, but I would require at least a 5% entry yield to purchase it. At current rates, this translates into a buy price below $54/share. Check my analysis of Realty Income for more information about the REIT.

BlackRock, Inc. (BLK) engages in the provision of investment management, risk management, and advisory services for institutional and retail clients worldwide. Its products include single and multi-asset class portfolios investing in equities, fixed income, alternatives, and money market instruments.

The company raised its quarterly dividend by 5.40% to $3.30/share. This marked the 10th year of annual dividend increases for this future dividend achiever. Blackrock has managed to boost dividends at an annual rate of 14.10%/year over the past decade.

Between 2008 and 2018, Blackrock managed to grow earnings from $5.78/share to $26.58/share.
Currently, the stock is fairly valued at 15.80 times earnings and yields 3.10%. Check my analysis of Blackrock for more information about the company.

Consolidated Edison, Inc. (ED), through its subsidiaries, engages in regulated electric, gas, and steam delivery businesses in the United States.

The company raised its quarterly dividend by 3.50% to 74 cents/share. This marked the 45th consecutive annual dividend increase for this dividend champion.

“The increase in the dividend, the 45th consecutive annual increase for stockholders, reflects our continued emphasis on providing a return to our investors while meeting the needs of our customers,” said Robert Hoglund, Con Edison’s senior vice president and chief financial officer.

Con Edison has managed to grow the dividend at a rate of 1.80%/year over the past decade. Given the decrease in the dividend payout ratio, I would expect dividend growth to pick up a little steam over the next decade to 3% - 4%/year. The company is targeting a payout ratio in the 60% - 70% range.

During the same time, earnings per share grew from $3.37 in 2007 to $4.12/share in 2017 ( adjusted for the effects of the next tax law signed at the end of 2017). Con Ed is expected to earn $4.30/share in 2018.

Currently the stock is fairly valued at 17.80 times forward earnings and yields 3.90%. I am reviewing ConEd for a potential purchase, especially if investor sentiment towards utilities turns sour.

Alliant Energy Corporation (LNT) operates as a utility holding company that provides regulated electricity and natural gas services in the Midwest region of the United States. It operates through three segments: Electric, Gas, and Other.

The company raised its quarterly dividend by 6% to 35.50 cents/share. This marked the 16th year of consecutive annual dividend increases for this dividend achiever. Over the past decade, it has managed to grow its dividends at an annual rate of 7.10%/year.

Between 2008 and 2017 earnings per share rose from $1.30 to $1.99. The company is expected to earn $2.16/share in 2018.

The stock is overvalued at 19.90 times forward earnings. Alliant Energy yields 3.30% and has a forward payout ratio of 65.70%.


CMS Energy Corporation (CMS) operates as an energy company primarily in Michigan. It operates through three segments: Electric Utility, Gas Utility, and Enterprises.

The company raised its quarterly dividend by 7% to 38.25 cents/share. This raise is in line with the average raise of 6.70% over the past five years. This increase marked the 13th year of annual dividend increase for this dividend achiever.

During the same time, earnings per share grew from $1.20 to $1.65/share. The company is expected to earn $2.34/share in 2018.

Currently, the stock is overvalued at 21.70 times forward earnings. The stock yields 3% and has a forward payout ratio of 65%. I usually like utilities at a P/E that is lower than 20, mostly around 15 - 16 times earnings.

Fastenal Company, (FAST) engages in the wholesale distribution of industrial and construction supplies in the United States, Canada, and internationally. It offers fasteners, and other industrial and construction supplies under the Fastenal name.

The company raised its quarterly dividend by 7.50% to 43 cents/share. This move marked the 20th consecutive annual dividend increase for this dividend achiever.

Fastenal has managed to increase dividends at an annual rate of 19.30%/year over the past decade.
The company managed to boost earnings from $0.94/share in 2008 to $2.62/share in 2018.

The stock is overvalued at 22.60 times earnings. It does yield 2.90% today. Fastenal may be worth a second look on dips below $52/share.

ONEOK, Inc. (OKE) engages in the gathering, processing, storage, and transportation of natural gas in the United States. The company operates through Natural Gas Gathering and Processing, Natural Gas Liquids, and Natural Gas Pipelines segments.

ONEOK raised its quarterly dividend to 86 cents/share. This is an 11.70% increase over the dividend paid during Q1 2018. ONEOK has managed to grow dividends at an annual rate of 16.10%/year over the past decade. The stock yields 5.60%

Relevant Articles:

Dividend Champions, Contenders & Challengers: The most complete list of US dividend growth stocks available
The Future for Dividend Investors
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Thursday, January 17, 2019

Stagnant earnings create a risky environment for dividend investors

As a dividend growth investor, my goal to purchase shares in a company at an attractive valuation, and then receive a rising stream of dividend payments for decades.

The companies that tend to shower shareholders with more dividends every year tend to be the ones who manage to grow earnings per share over time and have manageable payout ratios. These companies manage to distribute excess cash to shareholders in the form of dividends. As earnings are rising, this translates into higher annual dividends for these shareholders. Any remaining earnings are retained to maintain and grow the business, which results in more growth down the road.

At some point, corporations start facing challenges due to changes in the competitive environment. As a result, companies are unable to grow revenues and earnings per share. This in itself is not a problem, because shareholders could still in theory generate high returns, even if revenues and earnings are flat. For example, if a company stops growing and as a result sells at 10 times earnings, it can generate great returns to shareholders if it distributed most of its earnings in the form of dividends or share buybacks. If the company manages to cut costs a little bit, it can generate good long-term returns to shareholders. This is management’s job – to work for the shareholders.

Unfortunately, at some point, management teams become unhappy with the status quo. It is not exciting to be sitting still, generating a lot of excess cashflows, but not growing the business. All of this creates the urge for management teams to do something. Rather than focus on shareholder returns, they focus on growing the enterprise at all costs, in order to perpetuate the entity and get higher status in the corporate world ( and bigger paychecks too). This is an example of the tug of war between top management and shareholders. In theory, top management works for shareholders who have capital at risk. In reality, top management is only looking after themselves. Most CEO’s are not very good at what they do. It is usually the business model or the business environment that creates shareholder wealth – management usually just take the credit for being in the right place at the right time.

In some cases, they end up buying growth at inflated valuations, so that revenues grow and net income grows. That doesn’t fool investors however. In the process, these management teams discard the prudent strategy of dividend growth and share buybacks used to share profits with investors. By taking on more debt, or using stock at cheap prices to fund acquisitions at inflated values, these companies waste shareholder resources and endanger the financial viability of the enterprise.

A few companies I had in mind when writing this article include General Mills and IBM. I am tempted to include Altria as well, despite the fact that the company has managed to grow earnings and revenues.

General Mills (GIS)

For several years in row, General Mills had been unable to grow earnings per share. The company earned $2.70/share in 2011, and it was unable to grow beyond that amount. That is unfortunate given the fact that over 12% of shares outstanding were repurchased during that time period. The 2018 earnings per share have been adjusted for the one-time 89 cent/share impact of the new tax law signed at the end of 2017.

A few months ago, General Mills acquired Blue Buffalo, which produces pet food. Usually, acquisitions are a great source of future earnings growth, as you get synergies on top of existing lines of business. In the case of General Mills however, the company ended up overpaying massively, using cheap stock it sold at $44/share or almost 14 times forward earnings. This is unfortunate, because General Mills had acquired shares over the past five years at prices that were higher than $44/share.

Blue Buffallo was purchased for roughly $8 billion, and had earnings of $193 million in 2017. The stock was acquired for $40/share, while it earned 99 cents/share in 2017. The company had sales of $1.27 billion in 2017.

While General Mills did not obtain a lot of earnings power and revenues from Blue Buffalo, it mostly paid up for the future expected growth.

Perhaps they saw that some of their competitors own pet foods ( Nestle, Colgate-Palmolive, J.M. Smucker), so they decided to own a piece of the pie.

Nevertheless, I find it foolish that they spent billions of dollars buying back stock when it was high, only to sell billions in stock at the low price of $44/share. As a result, they are no longer buying back stock when the price is even lower today. And best of all, General Mills froze the dividend. When they sold those extra shares, now they have to pay even more in total dividend income, leaving less for growing the dividend income for the existing shareholders like you and me. Given the high yield today, some investors seem to believe that there is a higher chance of a dividend cut than an year ago.
I believe that management is trying hard to make themselves look better, after several years of stagnant revenues and earnings. This really created the pressure to do something. In reality, shareholders would have been better if the funds used to acquire Blue Buffalo were distributed as special dividends or even through share buybacks.

I believe that the underlying business that General Mills is strong enough to withstand some mismanagement. So while I will hold on to my shares for as long as the dividend is maintained, I doubt I will add to my position.

The stock looks cheap at 13.70 times forward earnings and yields 4.70% today. The stagnant earnings and stagnant dividend is what is keeping me away from adding to my position there. I will likely allocate dividends elsewhere as well.

International Business Machines (IBM)

A few months ago IBM announced that it would acquire cloud company Red Hat for over $34 billion. Red Hat earned $259 million in 2018 on annual revenues of $2.92 billion. I believe that IBM is overpaying for this acquisition. I believe that IBM is desperate to get out of the trend of declining revenues at any price, after experiencing several years’ worth of decreasing sales.

IBM’s 2017 revenues of $79 billion were smaller than their 2008 revenues of $103 billion. Earnings per share grew from $8.89 in 2008 to $11.98 in 2017 ( adjusted for the one-time impact of the new tax law enacted at the end of 2017).

I believe that IBM should have simply stuck to its role of growing the dividend and making share buybacks. At least the purchase is made with cash and debt. As a result of the acquisition, the share buybacks have been halted, which is ironic given the fact that the share price is at its lowest this decade and is selling at a very low valuation today. IBM shares are selling at roughly 13.90 times earnings and yield 5.20%.

If I were in charge of IBM, this would be the time to step on the gas to do buybacks when valuations are low. Or just distribute special dividends to shareholders.

It is likely that IBM can turn its operations around, and the stock today is a great bargain. However, it is also possible that it continues to go through a painful transition. IBM has been through a transition before, in the early 1990s. The company did manage to pull through, but had to cut its generous dividend ( ironically the stock was yielding around 5% at that time as well). In my case, I will continue holding on to any shares I own, but allocate dividends elsewhere. Due to the stagnant earnings per share, I do not see the stock as a long-term buy at the moment.

Altria Group (MO) 

Last month, Altria purchased a large stake in an upcoming competitor JUUL. I dislike the fact that Altria is overpaying so much, and it is also providing a lot of concessions which are going to disrupt its existing cigarette business. I wrote a more detailed article on the topic here. The difference of course is the fact that Altria has been able to grow earnings and even revenues over the past decade.

Conclusion

I believe that stagnant earnings and revenues create pressure for company executives to do something. This pressure leads to expensive acquisitions to grow the company's revenues and earnings at any cost. When companies are desperate to grow the bottom line at any cost through acquisitions, they risk overpaying for the shiny company with growth expectations behind it. When you overpay dearly for a growth company, you can undo the effects of a subsequent decade of favorable business developments. Ultimately, the price is being paid by shareholders, as the focus shifts from sending excess cashflows in the form of dividends, to purchasing growth at high valuations.

In the case of General Mills (GIS), IBM (IBM) and Altria (MO), these stocks are cheap today. If they can turn the operations around and grow those earnings, it is possible that an investment today will be a smart one. However, if there is integration risk, and rosy growth expectations do not turn out as expected, managements would have ended up wasting shareholder resources. Any extra debt can shift the focus from being a dividend growth company to becoming a growth company. This change in mindset can increase the risk of a dividend cut down the road, particularly if reality does not work out as the projections.

In my case, I will keep holding on to my positions in all three companies. However, I will allocate dividends elsewhere. If the dividends are cut, I will likely sell my positions there.

Relevant Articles:

What Attracted Warren Buffett to IBM?
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What should I do about slowing dividend growth?
Rising Earnings – The Source of Future Dividend Growth

Monday, January 14, 2019

The Dividend Crossover Point

The goal of every dividend investor is to one day accumulate a portfolio of income producing stocks, which would throw off a large amount of dividends every month. The magic point is where the dividend income exceeds the expenses of the dividend investor. At the dividend crossover point your dividend income meets or exceeds your expenses. For many dividend investors, this is the point synonymous with financial independence. After all, after years of sacrifice, wise investment and sticking to a plan, investors would finally be able to do be free from a nine to five job. The goal of reaching the dividend crossover point is achievable, but it takes capital, time, skill or luck in order to get to the magic point.



In order to reach that magical point, a lot of work needs to be done. Investors need to design a retirement strategy, and then stick to it through thick and thin, while also improving along the way. Some of the biggest dangers to successful dividend investing are not market volatility, dividend cuts or recessions, but investor psychology.

The process of accumulating a viable dividend stream will take anywhere from several years for those who are starting out with a large amount in their 401 (k) or IRA’s to a few decades for these young investors who are just starting out in their professional careers. Along the way, many investors will lose track of the goal due to sheer boredom or due to lack of patience. Successful dividend investing is sometimes as exciting as watching paint dry. Unfortunately, investors who enter dividend investing for the sheer excitement do not stick to it. On the other hand, investors who attempt to find shortcuts to speed up the process of capital accumulation by using options and futures, risky growth stocks or massive leverage will likely be disappointed along the way.

The key ingredients to accumulating a sufficient dividend income stream include time, dividend reinvestment and regular contributions to your portfolio. The power of regular contributions is important, because this ensures that investors consciously keep working towards their goal of dividend independence by investing in dividend stocks every month. While markets fluctuate greatly, I have always found at least 15 – 20 attractively valued income stocks at all times. Dividend reinvestment in dividend growth stocks is essential for turbo-charging your passive income. And last but not least, investors need the time to let their income compound to their desired amount.

Dividend investing takes time, before the amount of distributions reaches decent levels. Imagine that someone managed to save $1000/month for one year. Each month, they put $1000 total in two companies ($500 dollars per company per month). At the end of the first year, they would have about 24 companies, and the portfolio cost will be $12,000. If the average yield were 4%, this portfolio will generate $480 in annual dividends, which accounts for roughly $40/month. On the positive side, the dividends from this portfolio will generate enough to purchase one additional stock position per year. In addition, $40/month could pay for utilities, phone or internet bills for the investor pretty much for life. On the negative side, assuming that the investor needs $1000/month to cover their basic expenses, he or she would calculate that they would need to sacrifice almost for one decade, before their income reaches a decent amount. Once they are there however, and their portfolios consist of wide-moat dividend champions with sustainable distributions, investors will be able to live off dividends.

You can see that building that dividend machine can be a long term process. The levers within the control of the investor include their savings rate, ability to develop a strategy and stick to it, in order to allow the power of long-term investment compounding to do its magic.

In my investing, I have found very important to follow a few simple rules in order to create a sustainable dividend producing machine, which would produce dependable income for decades.

First, investors should focus on companies which have a long history of paying and raising dividends. I typically look for companies which have increased dividends for at least ten years in a row.

Second, investors should make sure that these companies are trading at attractive valuations. I have found that paying a P/E of over 20 could lead to poor results.

Third, investors should make sure that the company’s dividend is sustainable out of earnings or cash flows. I typically look for a dividend payout ratio of less than 60% for ordinary stocks. For REITs or Master Limited Partnership I look for FFO Payout and DCF Payout Ratios.

Fourth, investors should perform a qualitative analysis of the dividend paying company they consider for purchasing. This analysis should include understanding how the business makes money, growth prospects, competitive landscape, whether the business has any moat, whether the company has any strong brands, which consumers are loyal to and result in pricing power.

Fifth, investors should try to build a diversified dividend portfolio consisting of at least 50 -60 individual stocks coming from at least ten sectors. Having exposure to internationally based companies is a plus, despite the fact that most dividend growth stocks derive a major part of their profits from outside the US.

Conclusion

Today we discussed the concept of the dividend crossover point, which is the point where dividend income exceeds expenses. We also discussed the tools within the investor’s control to get there.

Finally, I shared a brief overview of the types of simple investing rules I follow to evaluate dividend paying stocks. All of the principles listed in this article are the cornerstones of the Dividend Growth Portfolio newsletter that I launched a few months ago. I believe that by showing how I am building a real world portfolio from scratch, I can educate investors on the inner works of dividend investing.

At the same time, dividend income makes it easy to see how we are doing against our ultimate goal of $1,000 in monthly dividend income. Right now, the dividend growth portfolio is earning $15 in expected average monthly dividend income after six months of saving and investing. I expect that by following the principles outlined in this post, we should be able to hit the dividend crossover point of $1,000 in monthly dividend income within ten to fifteen years. The outcomes vary, because the conditions over the next decade or so will likely vary as well. If more securities are available at higher starting yields or if dividend growth is faster than anticipated we will achieve our goals quicker. If on the other hand starting yields are lower and dividend growth is lower, we will achieve our goals in a slower fashion

Relevant Articles:

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Thursday, January 10, 2019

Blackrock (BLK) Dividend Stock Analysis

Blackrock (BLK) is the largest investment manager in the world, with over $6.5 trillion in assets under management.

Over the past decade, the stock has compounded by 14.96%/year. Future returns will likely be lower, and they will track growth in earnings per share and the initial dividend yield at the time of investment.



The company has managed to grow dividends for nine years in a row. In 2019, it will reach dividend achiever status.

Between 2007 and 2017, Blackrock compounded dividends at an annualized rate of 14.10%/year. The company last raised dividends by 8.70% to $3.13/share in July 2018. This was on top of the regular dividend increase in January, which lifted the quarterly distributions by 15% to $2.88/share.

Between 2007 and 2017, Blackrock managed to grow its earnings from $7.37 to $22.60. The 2017 figures are adjusted for one-time events related to the new tax law, as well as returning foreign earnings back to the US. The company is expected to earn $27.73/share in 2018.

The company is a leader in the asset management industry, with tremendous scale. It also has a diversity of products offered (equity, fixed income etc), geographic diversity ( Americas, Europe, Asia etc) in its products offered and the types of strategies offered ( active, passive, cash management). The company also has diversity in clients served – retail & institutional.
The company is a leader in ETFs, with tremendous inflows coming its way as there is a trend to switch from high cost mutual funds to ETFs. Unfortunately, passively managed ETFs provide a lot of assets, but not as much in profits as actively managed funds. The actively managed funds that Blackrock manages tend to be a portion of the assets, but account for almost half of profits. Actively managed products accounts for a quarter of assets and half of revenues. Passively managed assets account for 2/3rds of AUM, but half of revenues.

Blackrock has managed to grow organically, through new product introductions and through acquisitions. Given it massive scale, it is quite possible that new acquisitions will not have as big of an impact in the long-run. The massive scale does create advantages, since it spreads costs over a larger base, thus ensuring higher profits than smaller competitors. This also offers advantages in distribution as well.

Most asset managers manage to grow the bottom line by attracting new funds from new or existing investors, net of any that sell their holdings. Blackrock has done a great job growing assets organically and through acquisitions over the past decade. If financial markets rise over the next decade, it will also benefit from growing assets under management brought by higher prices. This is a two-edged sword however, because it leaves them exposed in the short-run by market volatility. I do believe that in the long-run, assets will likely go up, bringing a nice tailwind to investment managers such as Blackrock. If we get lower prices in the short run however, we will witness lower earnings per share and lower multiples. This is why I am buying those assets managers on the scale down.

The number of outstanding shares increased between 2009 and 2010, due to acquisitions. Blackrock has been steadily reducing the number of share outstanding since then. Regular share buybacks can increase investors ownership interest in an enterprise, and automatically lift earnings per share. Companies have to be careful however not to overpay for shares they are retiring, otherwise they are wasting shareholder assets.



The dividend payout ratio has remained around 45% during the current decade; the only volatility occurred during the 2007 – 2009 financial crisis, when declines in assets under management resulted in lower earnings per share. The company did keep the dividend unchanged in 2009. If 2019 is a tough year for stocks, we may see Blackrock freezing dividends once again. Once things normalize however, Blackrock will likely start growing distributions again.

Currently, shares of Blackrock are attractively valued at 14.40 times forward earnings and spot a dividend yield of 3.10%. Asset managers have been on sale as of recently in general, after a difficult 2018.

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Monday, January 7, 2019

British American Tobacco (BTI) Dividend Stock Analysis

British American Tobacco p.l.c. (BTI) provides cigarettes and other tobacco products worldwide. It manufactures vapour and tobacco heating products; oral tobacco and nicotine products, such as snus and moist snuff; cigars; and e-cigarettes.

The company is an international dividend achiever, which has managed to reward shareholders with a dividend increase every year since 1997.

Some of BTI's competitors include Altria Group (MO), Phillip Morris International (PM) and Japan Tobacco.

Earnings per share increased from 1.23/share in 2009 to 2.85/share in 2017. The 2017 figures have been adjusted for some one-time items related to the acquisition of Reynolds and the changes in US corporate tax code. The company is expected to earn 2.97 GBP per share in 2018.

The figures are in British Pound Sterling (GBP), since this is a British Company based in the UK. There will be currency fluctuations for US investors in British shares, driven by the changes in currency rates between the US dollar and the British pound. Even if the dividend increases in British Pounds, it is possible that your dividend income in US dollars decreases, if the British pound depreciates in value.

The stock price has plunged in recent months following fears that there will be ban on the sale of menthol tobacco products in the US by the FDA. Even if that happens however, it would take a long time to be implemented. Menthol cigarettes account to almost a quarter of profits. There is also increased pressure on e-cigarettes as well, which have been a growth opportunity for tobacco companies like BTI.

The number of smokers in the developed world is expected to keep declining. This effect is usually offset by price increases which are larger than declines in the number of smokers. BTI is investing in its next generation products, which could spur growth in the future, while also striving to maintain its position in the traditional tobacco products markets. I really like the fact that BTI is well diversified internationally, with exposure to North America, Eastern Europe Middle East and Africa, Europe, and Asia. This diversification spreads the regulatory risk down a notch.

BTI acquired Reynolds in 2017, and is working to integrate the operations, while also realizing the synergies expected from the deal. Future growth can also be achieved by acquisitions, which the company has had a strong history of successfully integrating under its umbrella.

BTI owns leading electronic cigarette brands such as Vype, Ten Motives, VUSE. In addition, it owns the brands iFuse and Glo, which are heated tobacco products. Major traditional tobacco brands include Kent, Dunhill, Lucky Strike, Rothmans and Pall Mall. Strong brands tend to have pricing power, which is good for profits in the long run. Given the global scale of operations, strong customer loyalty to brander products, high barriers to entry, and strong generation of excess cashflows and excess returns on investment, I believe that BTI has a wide moat ( though most other competitors such as Altria, PMI also spot a wide moat as well)

Companies like British American Tobacco can benefit from growth in emerging markets, where smoking is more widespread and declines in smokers are much slower. The company is well positioned in emerging economies.

The annual dividend increased from 70 pence/share in 2008 to 1.75 pounds/share in 2017. The forward annual dividend is 1.92 pounds/share.

The company switched from paying dividends twice per year to a quarterly dividend schedule by 2018. Prior to that it was paying dividends twice per year. The payments differed in size however, although in total they grew each year since at least 1997.

Since this is a UK based company, I analyzed the financial information in British Pounds. As a US based investor, I will be buying the ADR’s traded on NYSE, quotes in US dollars. The dividends in US dollars will fluctuate due to currency fluctuations between the dollar and the pound. In the long run however, these should not have that much effect, assuming that the underlying business model is not fundamentally impaired. 

The dividend payout ratio has increased from 57% in 2008 to 61% in 2017. The forward payout ratio is at 65%. While the payout ratio seems high, this is actually on the low side for a tobacco company.


The number of shares outstanding decreased between 2008 and 2016. The acquisition of Reynolds in 2017 for cash and stock increased the number of shares outstanding. I believe that while management will be prioritizing debt reduction over time, there should be some room for further share buybacks in the future.
The shares of British American Tobacco trade at a low valuation at just 8.70 times forward earnings and have a high dividend yield of 7.40%. Based on the forward payout ratio of 65%, the dividend looks safe. I view the stock as attractively valued today. There are plenty of other tobacco companies to choose from these days, including Altria and Phillip Morris International. While the future is cloudier, given the risk of obsolescence from other products, the valuations are compelling. If the dividend is at least maintained, investors should be able to generate some decent returns over the next decade.

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