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5 Reasons to Believe in Tobacco Stocks

Marijuana and e-cigarettes are breathing new life into tobacco stocks

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Tobacco Stocks and Dividend Yields

Four of the top five holdings in The Vice Fund (VICEX) are tobacco stocks. Combined, their average dividend yield is 4.4%. With such a healthy dividend yield it’s no wonder that these four stocks represent 21.6% of the portfolio.

If you perform a stock screen looking for consumer goods companies with market caps greater than $300 million and currently paying a dividend yield of 4% or more, you’ll find that five of the nine stocks that make the cut are tobacco stocks. No other industry in the consumer goods sector pays better. If you can overlook the sins of an industry, you’ve got good financial reasons for owning tobacco stocks.

Tobacco Stocks and Free Cash Flow

Tobacco stocks are cash flow machines. After all, where do you think those dividends come from?

Altria, Reynolds American (RAI), Lorillard (LO) and Philip Morris International (PM) generated $15.4 billion in free cash flow in 2013. Out of that they paid $11.5 billion in dividends and another $11.2 billion for share repurchases.

PM is the largest of the four tobacco stocks. It spent just $1.2 billion on capital expenditures in 2013, a fifth of the amount it allocated to stock buybacks. With rapidly declining sales in many of its mature markets, there’s minimal capital required to keep generating free cash flow. It’s a great business model that can only get better with any real success from either of the first two reasons.

Tobacco Stocks and China

Euromonitor released a research report in late May suggesting that, by 2018, one out of every two cigarettes around the world will be smoked by someone from China. It’s one of three markets (Indonesia and Vietnam are the others) worldwide that aren’t experiencing declining cigarette sales.

In 2013, China’s cigarette sales topped $200 billion. It’s a huge market that currently is controlled by the state-owned China National Tobacco Corporation, which has a virtual monopoly in the Chinese market. Were the Chinese government to relax their stance even a little tobacco stocks like Philip Morris would benefit greatly. It’s a long shot, but you can’t discount the opportunity.

Tobacco Stocks Bottom Line

No other industry has captured as much attention as the cigarette business. You can be sure that e-cigs and marijuana are subjects that will continue to captivate investors, especially those interested in tobacco stocks.

There are plenty of reasons to believe in tobacco stocks. However, once marijuana is legalized federally, that list reduces itself to just one. Marijuana is a can’t-miss, given tobacco companies’ experience selling cigarettes.

As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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