4 Overvalued Tobacco Stocks To Avoid Today

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 |  Includes: LO, MO, PM, RAI
by: Investment Underground

by Joe Escalada

Though tobacco stocks offer attractive dividends and a compelling business model, many investors avoid them for moral reasons. These socially responsible investors do not want to benefit from an industry that destroys health, reduces life-expectancy, and hooks customers through chemical addiction.

Moral and ethical stances are great, but does this boycott of stocks on the secondary market really make a difference? Buying shares through the stock market pays someone who bought the stock from someone else, who in turn bought the stock from someone else, who in turn bought the stock from someone else… who helped launch the company. Whether or not you buy these shares doesn’t dramatically impact new tobacco ventures. The toxins in the tobacco leaves and the market actors in the tobacco market don’t know that you own shares.

If you actually care about reducing or preventing tobacco-related deaths and health problems, here are three more effective ways to make a difference:

  1. Boycott tobacco companies. The best way to not smoke is to not smoke. Show friends and family how tobacco will ruin their lives using real data and tell them what they will miss out on (family events, good times, whatever) if they die early.
  2. Political action. Write your congressman or join an activist group.
  3. Don’t invest in new tobacco ventures or grow tobacco yourself.

This brief discussion is not meant to shake your moral compass. In fact, it is meant to highlight which routes travel furthest in direction to which it points.

Assuming you are comforable buying tobacco stocks, four are listed below:

Reynolds American Inc. (NYSE:RAI) recently traded around $40 per share. At this price level, the stock has a 5.6% dividend yield. RAI shareholders have savored a 31.0% change in share price over the past year, and higher market prices will be supported by a board-approved $2.5 billion stock buyback plan. At present, shares of this large cap stock trade at a price-to-book ratio of 3.5, a price-to-earnings multiple of 17.7, and a price-to-sales multiple of 2.8 (trailing twelve months). These valuations are pricey and curious, considering how over the past decade shareholders sustained a -0.8% average annual return on equity.

RAI lacks a global growth strategy, which means that it can only survive by profiting more from an aging U.S. population than it will lose to a seemingly endless stream of court cases, including patent infringement. This lack of direction and its unattractive price multiples do not make it a compelling buy.

Lorillard, Inc. (NYSE:LO) is another company that is pegging its future primarily to domestic sales. LO recently traded at $108.37 per share. At this price level, the stock has a 4.8% dividend yield. LO shareholders have savored a 39.1% change in share price over the past year. At present, shares of this large cap stock trade at a price-to-earnings multiple of 14.6, and a price-to-sales multiple of 2.3 (trailing twelve months). Moreover, the book value of LO shareholder equity is negative. Since the returns to firms with negative equity have underperformed firms with positive accounting values for equity, LO is not a compelling buy either.

Other tobacco stocks trade at cheaper multiples and have a better global presence. Philip Morris International, Inc. (NYSE:PM) recently traded at $74.86 per share. At this price level, the stock has a 4.1% dividend yield. PM shareholders have savored a 32.0% change in share price over the past year. At present, shares of this large cap stock trade at a price-to-book ratio of 61.4, a price-to-earnings multiple of 15.8, and a price-to-sales multiple of 1.7 (trailing twelve months).

Similarly, Altria Group Inc. (NYSE:MO) is a global operator which recently traded at $29.65 per share. At this price level, the stock has a 5.6% dividend yield. MO shareholders have savored a 16.2% change in share price over the past year. At present, shares of this large cap stock trade at a price-to-book ratio of 13.64, a price-to-earnings multiple of 17.8, and a price-to-sales multiple of 3.67 (trailing twelve months).

These stocks offer attractive dividend yields, though their valuation multiples are not compelling. These firms would need to be trading at cheaper prices to justify the legislative and judicial risks of additional court settlements, taxes, and regulations.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.