The Return of Tobacco: Safe Haven in a Volatile Market

Includes: BTI, MO, RAI
by: Mike Havrilla

Given recent market turmoil, most investors are likely starting to look for a place to hide where they can invest their money and outperform the overall market while reducing their risk exposure due to economic uncertainties and the prospect of a recession. Despite moral and ethical objections by some, the global tobacco industry provides such a safe haven during these highly volatile and mostly downward sloping markets of late. The industry is dominated in the United States by Altria (NYSE:MO) and Reynolds American (NYSE:RAI), while British American Tobacco (NYSEMKT:BTI) and Japan Tobacco [Tokyo: 2914] dominate their respective markets.

Of these tobacco goliaths, Altria is poised for near-term catalysts in the form of a split-up into the faster-growing Philip Morris International and high-yield, slower-growing Philip Morris USA, which is expected to occur before the end of this month. Also, Altria may give details at this time on plans to cash out of its remaining stake in SABMiller, which should provide a cash windfall over $10 billion that could enrich shareholders in the form of a one-time dividend, massive share buyback, etc.

As an alternative to investing in individual tobacco stocks, I have developed an idea for a Global Tobacco Exchange-Traded Fund [ETF], which is structured to select the top 22 stocks by highest dividend yield from worldwide markets. The average dividend yield for this group of stocks is 5.11% and only five of the stocks are based in the US, providing investors with global diversity, lack of single-stock risk, and exposure to higher-growth foreign tobacco markets.

The closest ETF that exists to my idea is the FocusShares SINdex (PUF), which was launched late last year and consists of 30 stocks in the gambling, alcoholic beverages and tobacco industries. My Global Tobacco ETF proposal is structured to provide both income (comparable to money market yields) and growth exposure (through foreign tobacco markets) while mitigating risk, as the tobacco industry has proven to be resilient despite the constant threat of litigation, which is really the only headwind facing the industry.

I have also launched a survey through my website and blog to obtain new ETF ideas that investors would like to see launched in 2008. Feel free to submit multiple ideas from any sector of the economy, which may include global markets, through this link. After responding, the survey will direct participants to a page with the results. Also, the survey is completely anonymous and does not collect any private information, as it only collects what participants type in as their response to the question.

Disclosure: none

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