- Altria is down 1.2%
- Lorillard is down close to 1%
- Philip Morris is down 0.9%
Is the tobacco world crumbling or did any local or international government issue any new regulation ? The answer is no. These stocks are selling off due to what could be called an "industry downgrade" by analysts at Standpoint Research. The reason for the downgrade ? Moral reasons. Yes, you read it right. Here are a few problems we find with this:
- After years and years of operations, the tobacco companies are being downgraded for "moral reasons" now? There is nothing new written in this downgrade analysis.
- The analyst , Mr. Ronnie Moas says he is very passionate about a few causes and he wants to see the annihilation of the tobacco industry. Sure, that is a very noble thought that he is interested in general welfare but a lot of people do not mix investment with their morals. Of course, there are exceptions but in case of Tobacco companies, people know what they are getting into. At least in the developed and developing countries, it is impossible that a smoker does not know the possible side effects.
- Mr. Moas has also downgraded Apple (AAPL) on the same moral grounds. This time, the reason is that Apple pays very less to its works while they continue hoarding cash. Again, noble when it comes to rational reasoning but not much of a business or investment rationale.
- In fact, almost every single business operates for profits and shouldn't investors love such companies that have massive reserves (Apple) or have repeat customers (Tobacco)?
- In a nutshell, with all due respects, Mr. Moas is expressing his personal opinion and this downgrade should have very little impact on these stocks in the long term.
Oppurtunity: That said, this downgrade might be a good opportunity to initiate positions or buy more of these stocks. Below are a few highlights:
- Philip Morris' yield has almost crossed 4.5%, a rarity since the 2008/09 spin off.
- Lorillard has a dividend increase coming up in February and this little sell off plus the new dividend will push the yield close to 5% for those buying at $49.
- Altria's yield has again been established firmly above 5% thanks to the this downgrade.
Conclusion: Some times we wonder if the market is efficient after all and all available data points are priced in. If so, a) isn't it well known that tobacco companies are involved in a business that not many approve of? b) aren't personal opinions supposed to not matter much in the long run?
Nonetheless, that exactly has been the secret of long term successful investors. They make use of every opportunity to buy bargains. The tobacco stocks aren't exactly bargains right now but in this overbought market, they might still be the best options for long term dividend investors. We welcome more such downgrades that have nothing to do with the business fundamentals.
Additional Disclosure: This article does not endorse smoking.