It looks like the whole tobacco industry has made a concerted cdecision to have the highest possible dividend payouts. Altria (NYSE:MO), the owner of Philip Morris USA, made the decision to spin off the growth part of the business — Philip Morris International (NYSE:PM) — and keep the more stagnant cash-generating U.S. operations. They may be shrinking slowly, but steady price hikes and good cost controls indicate a reliable dividend stream for many years — possibly decades.
But what exactly is Altria today? There is more to it than Philip Morris USA, as Altria bought smokeless tobacco maker UST recently. Altria also owns John Middleton, a company dealing in machine-made large cigars and pipe tobacco. In addition to the finance subsidiary — Philip Morris Capital — Altria holds a 27.1% stake in SABMiller, which causes it to consolidate the beer conglomerate’s operational performance onto its financial statements as the stake is larger than 20%, according to GAAP. There is even a wine division that was acquired as part of UST, so the company is well-diversified with leading positions in the so-called “sin sectors” — alcohol and tobacco.
The business is fabulously profitable despite the bad press it gets, with operating margins of 39.6% and return on equity of 72.1%. Charges to book value have been quite extraordinary over time — one reason for the low book value — and the high dividend payout may be a managerial decision to deter opportunistic litigators from going after its cash pile with class action suits. The strategy has worked as the dividend has remained consistently much higher than the 10-year Treasury note yield over the past 10 years, currently standing at 5.9% (or $1.64 a share annually).
The great difference between dividends and bond interest payments is that there is a built-in inflation hedge where operating companies can raise prices and pass through higher dividend payments to their shareholders thus keeping the yield high. Bond yields also rise in an inflationary environment, but at the expense of falling bond prices (TIPS are the few exceptions). So investors interested in companies that have a policy of sustainably high dividends over time — the company currently has a 93% payout ratio — could be well rewarded even if/when inflationary pressures pick up.