The market’s been smoking hot since it cooled down to its August nadir, and one of the sectors leading the way higher is, well, literally smoking. Tobacco stocks have been on fire of late, including Altria (NYSE: MO), British American Tobacco (AMEX: BTI), Imperial Tobacco Group (OTC: ITYBY), Lorillard (NYSE: LO), Philip Morris International (NYSE: PM) and Reynolds American (NYSE: RAI). Each of these stocks has posted big gains over the past three months, and all but two have seen substantially bigger gains over the past 12 months.
Here’s a quick rundown of the performance of tobacco stocks over the past three and 12 months (data as of 11/4/10):
|Ticker||Name||3MOS Performance||12 MOS Performance|
|BTI||British American Tobacco||11.3%||22.6%|
|ITYBY||Imperial Tobacco Group||15%||12.3%|
|MO||Philip Morris International||16.5%||28.4%|
|SPX||S&P 500 Index||8.3%||16.68%|
As you can see, all of these stocks have handily outperformed the S&P 500 Index over the past three months, and only Imperial Tobacco and Lorillard failed to best the broad market measure over the past year.
Now, one might be tempted to think that due to the ever-increasing social stigma, along with the growing number of public smoking restrictions, cigarette sales would be in the ash tray. One might also be tempted to conclude that earnings from tobacco companies are going up in smoke. If you think that, then you’d be wrong on both counts.
The fact is that despite the aforementioned negatives facing the industry, as well as the omnipresence of current lawsuits and the threat of near-certain future lawsuits, tobacco companies actually are doing very well.
On Oct. 21, industry giant Philip Morris reported that third-quarter earnings rose 8% from a year earlier to $1 a share. The latest quarterly earnings figures represent the fourth-consecutive quarter of earnings gains for the tobacco giant. Philip Morris also raised its full-year EPS guidance to $3.90-$3.95, and boosted its dividend 10% to an annualized $2.56 a share (a yield of 4.3%).
Philip Morris’ parent company, Altria Group, reported a 28.2% increase in Q3 earnings to an impressive $1.13 billion, or 54 cents per share, well above the 52 cents per share consensus estimate. Altria also raised its 2010 full-year guidance from a range of $1.81 to $1.85 a share to a range of $1.83 to $1.87, reflecting tax benefits. On an adjusted basis, the company reaffirmed its guidance.
The story is much the same for Lorillard. The No. 3 U.S. tobacco company reported a year-over-year net earnings increase of 16.6%, to $274 million, or $1.81 a share.
Lorillard said that during the quarter, domestic wholesale shipments increased 5.8% vs. the same period last year.
Earnings in tobacco-land are strong, and that’s a big reason why investors keep lighting up the sector. Add to the fact that most of these stocks pay solid dividends and offer attractive yields, and you get an industry delivering the nicotine investors really crave — big price performance.
As of this writing, Jim Woods did not own a position in any of the stocks named here.