Investors will need no further reminders — it has been an extraordinarily ugly start to 2016 for the financial markets.
After the midweek session drew to a close, the Dow Jones Industrial Average sat with a year-to-date loss of 9.5%, inches shy from being termed a correction under traditional definitions. The unlucky Nasdaq Composite index is already there, with a performance totaling near 12%.
Seemingly everyone is having a rough go in the markets … with a few noteworthy exceptions.
One industry that continues to weather the storm is Big Tobacco. Although it would be inaccurate to say that they are totally unaffected, Big Tobacco stocks have yet to see the persistently volatile movements experienced in other industries. Even exchange-traded funds that carry Big Tobacco companies within their portfolio, such as the Consumer Staples Select Sector SPDR (XLP), have been able to pare their losses relative to the broad markets.
But is this ability to stay afloat an anomaly, or is there something fundamental supporting the industry?
Like it or not, so-called vice stocks are on a resurgence, and Big Tobacco stands to gain big, even when the rest of the markets are rapidly approaching panic mode.
First, there’s a litany of data to suggest that smoking in America is on the rise. This is further exacerbated by the popularity of e-cigarettes, which has previously attracted the interest of Big Tobacco.
Second, a dearth in state-implemented anti-smoking measures have prompted organizations like the Centers for Disease Control to ramp up their marketing campaigns specifically targeting Big Tobacco. However, their efforts are largely overwhelmed from a dollar-to-dollar perspective.
Finally, favorable economic trends — namely, lower gasoline prices — have led to discretionary spending funds finding their way into Big Tobacco’s pockets.
This unintended consequence of the Brent Crude Oil collapse is probably the single biggest worry of health agencies. On the other hand, it represents a potential revenue boon for Big Tobacco as their products are sold in virtually every gas station. Add in the typically generous dividend yields that cigarette companies offer and there is a compelling case for exposure to Big Tobacco stocks, particularly during these rough times.
Big Tobacco Stocks to Buy: Altria Group Inc.
When people think of Big Tobacco, they usually have one name in mind — Altria Group Inc. (MO). As owners of the controversially iconic Marlboro brand, MO leverages extraordinary weight.
In fact, Marlboro is the only Big Tobacco product that made it into the most recent list of The World’s Most Valuable Brands, according to Forbes. Ranked at number 27, it leads other well-known names such as Visa or Pepsi, and closely trails renowned luxury auto manufacturer Mercedes-Benz.
This confidence boost should serve MO stock well in its fourth quarter of fiscal year 2015 earnings report, which is set for release on Jan. 28. MO’s earnings-per-share consensus target of 68 cents is a modest two-cent increase over its year-ago estimate.
It’s a fully attainable goal considering that profitability margins have generally improved over the past four years and total sales for 2015 is on pace to exceed last year’s results by nearly 5%. Given the fundamental backdrop of crude-oil-driven cigarette sales, it’s likely that MO will give Wall Street a nice earnings surprise.
On the technical front, MO stock has enjoyed a 10% run in the markets since the beginning of September. As a result, investors may experience a near-term corrective pullback — on a YTD basis, MO is down 1.3%.
That said, Altria did manage to hold the fort very well during last August’s equities meltdown. In addition, MO has a history of paying dividends consistently, even in bearish markets.
That sort of consistency may be the primary factor driving buyers into MO stock, especially when everything else seems so uncertain.
Big Tobacco Stocks to Buy: Philip Morris International Inc.
Often associated with motor sports sponsorships through its shared ownership of the Marlboro brand with Altria, Philip Morris International Inc. (PM) certainly lives up to its name. Spun off from Altria with the intended purpose of capturing global market share, PM products are distributed across more than 180 countries.
In 2014, PM attained nearly 16% of tobacco market share excluding the U.S., which is the primary domain of Altria. As a result, Philip Morris’ revenue for FY2014 nearly hit the $30 billion mark, the biggest haul among Big Tobacco companies.
However, PM’s expanded sales region as compared to America-centric Altria does come with a price. Because the U.S. dollar remains in an elevated status relative to international currencies, PM hasn’t performed as well as it could have without the headwind. While other Big Tobacco companies are raking in the dough from the lift in discretionary spending, Philip Morris is expected to lose money. Wall Street consensus estimate pegs PM’s revenue for FY2015 at just under $27 billion — a sharp 10% decline from the prior year.
With that said, PM stock has performed fairly well amid the January selloff, where it has only lost a little under 2% YTD.
Perhaps the most compelling reason, though, that investors will be interested in PM is the dividends. Currently, its yield stands at 4.7%, the most generous among the Big Tobacco stocks mentioned on this list.
Given the ugly nature of the broad markets, PM could turn out to be a much-needed source of stability.
Big Tobacco Stocks to Buy: Reynolds American, Inc.
Though it sharply trails the aforementioned Big Tobacco stocks in terms of market capitalization, Reynolds American, Inc. (RAI) — which owns popular brands Camel, Winston, and Kool, among many others — isn’t a company to be taken lightly. After its $25 billion acquisition of competitor Lorillard, RAI added the Newport brand to its lineup — the top-selling menthol cigarette in the U.S.
The real treat is witnessing the positive impact the buyout has had on RAI’s financials. In Q3 FY2015, top-line sales nearly hit $3.2 billion — a 41% jump on a year-over-year basis. Total revenue for 2015 is expected to hit $10.6 billion, or a 25% increase over the prior year. For EPS estimates, Wall Street consensus forecasts 50 cents per share, which is a thoroughly realistic target considering RAI’s pronounced bump-up in profitability margins.
Although RAI is considered a defensive stock, its performance in 2015 belied the implications of that label. Reynolds shares returned 47% in the markets, vastly outshining its Big Tobacco competitors MO (20%) and PM (12%). RAI gained 28% since the week of the Lorillard acquisition, suggesting that investor sentiment is reasonably balanced — rather than skyrocketing off a singular event, shares have been steadily gaining ground at an accelerated pace.
For those who are interested in the relative safety of Big Tobacco stocks, but also want the chance to make healthy returns, RAI may be an ideal choice.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
