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Should Tobacco Dividends Be Lower Than Telecom Dividends?

This past week we could not help noticing how low tobacco dividends have become. The driving force may be a tie-up coming between Reynolds American Inc. (NYSE: RAI) and Lorillard Inc. (NYSE: LO). Still, an all-time high for Altria Group Inc. (NYSE: MO) this past Monday is keeping the Altria dividend yield lower than most might have expected before. AT&T Inc. (NYSE: T) is the king of Dow Jones Industrial Average dividends, and it is nearly 1% higher in yield than Verizon Communications Inc. (NYSE: VZ).

There are many things happening that have created higher valuations for tobacco and lower valuations for telecom. Yet, tobacco is still a killer. No one actually calls e-cigarettes a health product. Telecom companies do not kill people, other than those who cannot put their phones down and get too distracted to drive without crashing.

Verizon yields 4.3% and AT&T yields 5.25%. If you created a portfolio of the three tobacco stocks versus a portfolio of the two telecom leaders, the results would be 4.3% for tobacco and almost 4.8% for the telecom leaders.

We did include both AT&T and Altria among 10 of the highest-yielding S&P 500 dividends that are safe to hold. Still, should AT&T outyield Altria by almost 0.7%?

Where things get strange is that telecom is not exactly a bright spot for investors. AT&T shares are almost dead on where they were a year ago. Sure, AT&T has made this huge grab for DirecTV (NASDAQ: DTV). We ran the analysis on this, and its dividend will still be safe after the DirecTV acquisition.

Verizon made its huge move in 2013 to acquire the rest of the Verizon Wireless stake held by Vodafone Group PLC (NASDAQ: VOD). Verizon’s shares performed well on the deal, but if you go back a year, then Verizon shares are actually down.

The public is more addicted to smartphones now than it is to tobacco. The big tobacco companies are all making moves into e-cigarettes, but the reality is that vaping is still very small for their own businesses, and they allowed many competitors and upstarts to get a leg up here. Now the question will come down to how the Food and Drug Administration will regulate non-tobacco nicotine.

Does telecom have any serious regulation coming down the pipe? Maybe if you consider net neutrality, but Congress and the courts seem not to care too much about the matter. The public outcry for faster movie downloads and higher bandwidth is of course there, but it isn’t exactly the same as the years of lawsuits and protests against big tobacco for lung cancer, throat cancer, emphysema and a host of other diseases that have killed millions.

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When it comes to tobacco, the comparisons from a year ago are uncanny. What we cannot ignore is that all three of the tobacco stocks are trading above the consensus Wall Street analyst price targets. While analysts are often behind the curve, or often fail to participate in rallies, can we say that it is safe to assume the majority of them are just dead wrong? Maybe, but maybe not.

Altria’s yield a year ago was 4.9%, versus just over 4.6% now. Altria shares traded at about $36.15 a year ago, versus $41.40 now. The consensus analyst target is $40.00.

Reynolds American’s dividend yield was 5.2% right around this same time in 2013, versus 4.45% now. Its stock traded around $49.10 a year ago, versus $59.35 now. Analysts have a price target of $54.71.

Lorillard’s dividend was close to 5.0% a year ago, but the merger premium speculation has the dividend down closer to 4% now. Lorillard shares were around $45 a year ago, versus almost $60 now. Lorillard’s consensus analyst price target is also just under $54.75.

Again, tobacco companies face hurdles beyond most businesses. States and cities are only going to keep increasing their taxes. Case volumes of cigarettes are going to remain in decline, which the companies will hope to offset by e-cigarettes. Social pressure remains against tobacco companies and likely always will.

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Most people seem to have unhealthy addictions to their smartphones. How many times have you been run into by someone walking on a street because they were too engaged on their smartphones? How many times have you been almost hit by someone texting in a car or by someone too engaged on their smartphone? Still, no national regulation has come down on smartphone users. Then there is that age-old argument about brain cancer risks, which remains highly debatable.

Investors often pile into telecom dividend stocks and tobacco dividend stocks when they become uncertain about the stock market. They are both defensive and ways to stay in the market without losing your shirt in a stock market correction.

It turns out that for dividend investors, and maybe for the public in general, smartphones may just be the new cigarette.

 

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