Why tobacco stocks haven’t fizzled out

Why tobacco stocks haven’t fizzled out

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Governments, doctors and activists have been waging war on smoking for decades, but Big Tobacco abides

In the 1960s, more than 40 percent of Americans smoked tobacco. That number is now down to 18. Whereas it was once perfectly normal to smoke anywhere, indoors or out, so long as the walls weren't covered in kerosene, statewide indoor smoking bans have spread in the US to the point where they are threatening even some diehard holdouts, like Louisiana.

We even have a smoke-free country now. And while Bhutan's no-hold-barred, War On Drugs-style tobacco ban is widely decried as draconian and ineffective (it didn't work in 1729 either), Bhutanese officials seem to think it boosts Gross National Happiness. 

Yet in America, at least, the overall decline in smoking masks differences based on race, education and income. According to the CDC, 26.1 percent of multiracial individuals in the US smoke compared to 10.7 percent of Asians; 24.7 of adults without a diploma smoke versus 5.9 percent with a postgraduate degree; 27.9 percent of adults living below the poverty line smoke while 17 percent living at or above do.

Along with 28.3 percent of Kentuckians.

Nor should we forget that the popularity of e-cigarettes has turned much of the tobacco market back into the regulatory Wild West it was circa 1940. Long-standing, strictly enforced bans on certain kinds of advertising went up in vapor—along with bans on where one could light up, since, after all, there was no fire involved.

For a brief moment, it was Joe Camel's heyday again, as advertisers were using sex to sell tobacco, your friend was openly vaping in your living room and, since researchers hadn't had a chance to call him out on it, that same friend was extolling the health benefits of his toffee-flavored deathstick.

Luckily the researchers are starting to weigh in, but you don't have to be a doctor to see that bronchiolitis obliterans, an ailment associated specifically with e-cigarettes, sounds an awful lot like "lung obliteration."

Long story short, the "omg another country/state enacted a smoking ban, Big Tobacco is probably going into a tailspin any second now" narrative (example) is a bit oversimplified. 

A quick back-of-the-napkin calculation shows the five biggest cigarette industry stocks by market capitalization (listed below) outperforming the S&P 500 by a healthy margin. To find a tobacco stock that bit the dust, you must, ironically enough, look to e-cigarettes, specifically Electronic Cigarettes International Group (ECIG).

At this point, with a wave of regulatory curbs on e-cig marketing and usage on the horizon, Big Tobacco stocks are probably the safest way to get exposure to e-cigarettes, as smaller companies will likely struggle to thrive in a heavily regulated environment.

 

Lorillard (LO) started the trend when it acquired Blu e-cigarettes, followed in due course by the other giants: Phillip Morris (PM), British American Tobacco (BTI), Reynolds American (RAI) and Altria (MO).

Given that so many e-cigarette users frame the devices as a means to quit smoking, the new products are unlikely to open new markets of significant size. And for all the aforementioned caveats to the decline in smoking narrative, the fact remains that Phillip Morris' sales volume decreased slightly in Q3 2014.

However, what many investors find really appealing about tobacco stocks is their resistance to economic cycles, which they share with other sindustries, and their generous dividend yields. As Michael Kahn writes for Barron's, even a tobacco stock that goes "nowhere" can be an good defensive investment against geopolitical uncertainty (of which there's no shortage).

How generous are these dividends, you ask? 

Click on the interactive chart to view data over time. 

1. British American Tobacco plc (BTI, Earnings, Analysts, Financials): Engages in the manufacture, distribution, and sale of tobacco products. Market cap at $100.04B, most recent closing price at $106.12.

 

 

2. Lorillard, Inc. (LO, Earnings, Analysts, Financials): Engages in the manufacture and sale of cigarettes in the United States. Market cap at $22.55B, most recent closing price at $62.64.

 

 

3. Altria Group Inc. (MO, Earnings, Analysts, Financials): Engages in the manufacture and sale of cigarettes, smokeless products, and wine in the United States and internationally. Market cap at $96.79B, most recent closing price at $48.97.

 

 

4. Philip Morris International, Inc. (PM, Earnings, Analysts, Financials): Engages in the manufacture and sale of cigarettes and other tobacco products in markets outside of the United States. Market cap at $125.88B, most recent closing price at $81.02.

 

 

5. Reynolds American Inc. (RAI, Earnings, Analysts, Financials): Reynolds American Inc. (RAI), through its subsidiaries, manufactures and sells cigarette and other tobacco products in the United States. Market cap at $33.91B, most recent closing price at $63.82.

 

(List compiled by David Floyd. Monthly returns data sourced from Zacks Investment Resources, all other data sourced from Finviz.)

 

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13 responses to “Why tobacco stocks haven’t fizzled out”

  1. carla says:

    I didn't know you weren't allowed to smoke in Bhutan! I don't know what to say about it. My first reaction was to applaud them for this. Great thing! Just make bad things illegal. But on the other hand, it raises an ethical question: can you stop people from doing something that makes them happy just because it's a bad thing?

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  7. Vaping is far less harmful than smoking. In addition, if you buy e-cigarettes from sites like Vista Vapors and use online coupons, e-cigs are a lot cheaper as well.

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  9. ECASSOC says:

    Hopefully they do fizzle out, cigarettes do nothing but kill people and cause cancer. So greedy of the government to keep them around for their own pockets…I was lucky to find reviews of e cigs that helped me quit.

  10. Andy Gray says:

    The e cig industry has come under continual fire from government, anti-smoking, and consumer groups for many reasons. This industry is, as yet, unregulated. Products contain nicotine and there have been disturbing revelations about other ingredients such as diacetyl which, when inhaled regularly, can cause a life-threatening illness know as “popcorn lung.” https://www.ecassoc.org/

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