Health issues aside, tobacco/cigarette companies are among the most recession resistant businesses. In many cases, and due to a wide variety of circumstances, sales of such vice-based products actually increase when consumers work less and/or cut food budgets. Additionally, nicotine is known to calm the nerves during stressful situations, curb ones appetite and even provide a slight stimulative effect. Additionally, due to the addictive nature of the vice, smokers are often reluctant to cut tobacco from their budgets.
As a result of the less than expected recently added regulations and taxes, coupled with prior state settlements, tobacco companies performed well during 2009 and 2010, along with the broader market. Moreover, and largely due to their above-average dividends, recession resistant businesses, strong brand recognition and the ability to raise prices, tobacco companies fared exceedingly well during 2011, vastly outperforming the broader market, while also providing an average yield easily over twice the broader market's.
Below, I have provided the present yield and recent performance for six publicly traded tobacco companies: British American Tobacco (NYSEMKT:BTI), Lorillard (NYSE:LO), Altria Group (NYSE:MO), Philip Morris International (NYSE:PM), Reynolds American (NYSE:RAI) and Vector Group (NYSE:VGR).
Most of these companies performed well since the recent financial crisis first hit the markets, but the industry did depreciate considerably in 2008. Most have also since moved up 40-60 percent. Thus far in 2012, it appears above-average volatility will continue to affect the tobacco business, especially as investors seek out higher dividend paying investments in order to supplement near zero risk free rates of return. Tobacco companies offer a significantly higher yield, but one that can hardly be called risk free.
One of the greatest risks to the tobacco continued taxation. At the onset of this financial crisis, many investors stayed clear of tobacco equities due to concerns over the industry's future domestic growth and a belief that the then incoming Obama Administration would increase cigarette taxes and regulations. Though federal excise taxes on cigarettes were increased from 39 cents to $1 per pack, expectations were even higher.
New regulations and/or taxes could be implemented at any point in the future, and the potential for eventual further taxation of tobacco appears probable. Nonetheless, these companies have thus-far easily pushed through price increases on their often captive and brand-loyal customers, many of whom rely upon a smoke to help get through stressful times, or even merely get up in the morning.
Disclaimer: This article is intended to be informative and should not be construed as personalized advice as it does not take into account your specific situation or objectives.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.