Is Tobacco a Safe Haven in the Current Market?

The table above (click on the image for a full-screen view) highlights a global tobacco income index which screens for companies with market caps of greater than $200 million which pay regular cash dividends to shareholders. All companies which are majority-owned subsidiaries of another entity or foreign holding companies of the major tobacco companies such as Philip Morris International (PM) and British American Tobacco (BTI) were excluded from this index. The index is composed of 23 companies from across the world and is weighted by a formula which combines both market cap and trailing 12-month dividend yield. The trailing 52-week weighted return for the index is -6.6% with a weighted dividend yield of 4.4%, which compares favorably to the overall market as measured by the S&P 500 (SPY) exchange-traded fund [ETF] which is down 19.1% with a 2.2% yield. The overall return for the global tobacco income index is comparable to the consumer staple ETFs on the market with an overall loss of 2.2% versus an average total return of -2.1% for the three consumer staple ETFs highlighted in the table (XLP, VDC, KXI).

Despite the ongoing threat of litigation and growing ban of public smoking, the tobacco industry seeks growth in many emerging and frontier markets, as evidenced by the spin-off of the faster-growing Philip Morris International (PM) from Altria (MO). With an abundance of low earnings multiple stocks and above-average dividend yields, the tobacco industry offers investors a safe-haven during the current market turmoil and economic uncertainties. Although I have never used tobacco products and would not encourage others to do so; millions of people worldwide choose to make tobacco a daily ritual and the industry offers investors a reliable, low-risk option with above-average income in the form of dividends.

Comments

[Dan Jacome:]

Good data points, thanks. No mention of LO?

That is our favorite in the group - although you won't get any intl exposure with the stock, the valuation is compelling relative to the increase in dividend payout I am expecting next year...$82 12 month target

see our thoughts here:

seekingalpha.com/artic...

2008 Jul 16 10:14 PM

[Mike Havrilla:]

Lorillard (LO) is #13 on the spreadsheet w/ a 3% weight in the 23-stock index with data included since its spin-off at the end of June.

2008 Jul 17 05:41 AM

[User 146323:]

The market's rotation in and out of defensive sectors like tobacco has been evident and acts as a spoiler. There has been more volatility with MO and PM lately. Though if one looks at their (3) months performance vs. the DJ there is no denying that one was better sticking with them.

2008 Jul 18 03:42 PM