Philip Morris International Inc. (PM), Lorillard Inc. (LO): Five Consumer Dividend Stocks With Sustainable Payouts
Some common concerns for income investors include building a portfolio which is diversified in a number of ways- including investments in dividend stocks in several different industries and sectors- and where the stocks in question are easily able to fund their dividends. One way to quantify a company’s ability to maintain its dividend is through the dividend payout ratio, and high yielding stocks can be screened to ensure this figure is low before investors consider targets for future research. Using data from Fidelity, here are the five consumer stocks with market capitalizations of at least $2 billion, dividend yields of at least 4% at current prices, and dividend payout ratios of less than 70%:
Paying an annual yield right at 4% is Philip Morris International Inc. (NYSE:PM). This dividend yield is actually lower than what we see at many other cigarette companies, as Philip Morris International Inc. (NYSE:PM) - formed, along with Altria Group, in the breakup of the old Philip Morris International Inc. (NYSE:PM) company- focuses on international markets which theoretically have better growth prospects. It should be noted, however, that the company’s recent financial performance has been weak.
We track quarterly 13F filings from hundreds of hedge funds and other notable investors as part of our work researching investment strategies; we have found, for example, that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year with our own portfolio based on these techniques easily outperforming both the S&P 500 and Russell 2000 indices since inception 11 months ago. Learn more about our small cap strategy. Our database of hedge fund filings also comes in handy for tracking interest in individual stocks, and we can see that billionaire Ken Fisher’s Fisher Asset Management owned 5.9 million shares of Philip Morris at the end of June (find Fisher's favorite stocks).
Another cigarette company to make this list is Lorillard Inc. (NYSE:LO), as that stock pays a higher yield (of just over 5%) but still generates enough earnings to keep the payout ratio below 70%. In fact, Lorillard Inc. (NYSE:LO)’s price-to-earnings multiple is fairly low, at 13, and so we think that we might be interested in considering it as a value play as well as an income stock. In addition to these high dividend and earnings yields, and the low beta which comes with being a cigarette stock, Lorillard Inc. (NYSE:LO) is also notable for seeing growth in both revenue and earnings last quarter compared to the second quarter of 2012.
While Garmin Ltd. (NASDAQ:GRMN) qualifies for this list in terms of having a low payout ratio (of only about 50%), we’d still be wary that the GPS device manufacturer’s yield of 4.4% is in fact safe from future cuts. Smartphone apps, as well as in-car GPS, seem poised to decimate the company’s business although thus far the impact of this competition on sales and net income has in fact been limited. Still, Wall Street analysts are predicting further declines in earnings per share next year and so even with Garmin Ltd. (NASDAQ:GRMN)’s cash hoard we would be wary here.
It’s been a tough year for Darden Restaurants, Inc. (NYSE:DRI), as the company’s poorly timed expansion has resulted in roughly a 10% drop in earnings (sending the stock price down by a similar amount in the last year). Still, the dividend yield is quite high at 4.7% and that is with a fairly safe payout ratio even after an increase in the quarterly dividend from 50 to 55 cents earlier this year. At current prices the stock trades at 15 times trailing earnings. Millennium Management, run by billionaire Israel Englander, was buying Darden Restaurants, Inc. (NYSE:DRI) last quarter (check out Englander's stock picks).
Rounding out our list of dividend prospects in the consumer sectors is $4.1 billion market cap furniture and furnishings company Leggett & Platt, Inc. (NYSE:LEG). The company has steadily increased dividends over the last 15 years, and currently features an annual yield of 4%. The payout ratio is not too high, and in addition Leggett & Platt, Inc. (NYSE:LEG) recorded modest growth in profits in the second quarter of 2013 versus a year earlier. The sell-side doesn’t expect any improvement in EPS in 2014 over the trailing numbers, but the company seems healthy enough to support the current dividend.
Disclosure: I own no shares of any stocks mentioned in this article.