Tobacco and cigarette equities are frequently touted as recession-resistant industries. Due to the addictive nature of the vice, smokers are often reluctant to cut tobacco from their budgets, even though the cost of cigarettes, especially after taxes, has continued escalate.
Moreover, cigarettes and other tobacco product sales often increase when consumers are forced to cut food budgets, work longer hours and deal with stressful situations. Despite the known realities of the negative health consequences associated with tobacco, nicotine is also known to calm the nerves during aggravating situations, curb one's hunger and act as a stimulant.
Further, the metaphorical dark cloud surrounding tobacco will keep many individuals and even some institutions and funds from investing in tobacco equities. This disinterest by some investors might contribute to market undervaluation of tobacco related equities, as there could often be fewer buyers of cigarette manufacturers than there might be for many other consumer goods makers.
Below are the present yields and recent equity performance rates for six publicly traded tobacco companies: British American Tobacco (BTI), Lorillard (LO), Altria Group (MO), Philip Morris International (PM), Reynolds American (RAI) and Vector Group (VGR). I have provided their 1-week, 1-month, 2012-to-date and 6-month equity performance rates.
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Due to their above-average dividends, recession-resistant businesses and strong name brands, tobacco companies performed well during 2011, and considerably outperformed the broader market, while also providing an average yield easily over double that of the broader market or a 10-year U.S. Treasury. These six equities average a 5.44 percent yield and have appreciated by an average of 7.68 percent since the start of 2012.
See the 2012-to-date performance comparison chart for the above-listed tobacco companies, below:
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Four of the six are positive thus far into 2012, with RAI and VHR down a few percent since the start of the year. Shares of both BTI and MO have appreciated about 8.5 percent so far, or about the same as the broader market as defined by the Dow Jones Industrial Average, while LO and PM have considerably outperformed the benchmarks so far.
Significant risks could affect the cigarette industry, including continued health-related taxation and the further restricting of smoking from various public locations. Many investors continue to stay away from domestic tobacco equities due to concerns over the industry's future growth projections, and a belief that the Obama Administration might enact steeper cigarette taxes.
Since the crisis hit the markets in 2008 and 2009, federal excise taxes on cigarettes have increased from 39 cents to $1 per pack. Many speculated that the tax rate would end up increasing to well above its current level, and anticipate that another increase, or series of increases, may be forthcoming. 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 continue to easily pass price increases through to their often captive and brand-loyal customers.
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.
