Of the so-called “vice investments” that are available in the markets, tobacco stocks are simultaneously controversial and beloved. Unless you’ve been living in a cave, the controversy surrounding tobacco firms is self-explanatory. But many industry investors have rationalized their portfolio because of the dividends.
The beauty of tobacco stocks is not just their ability to generate passive income, although it’s certainly a big draw. The S&P 500 currently has a yield of 1.9%. Statistically, this is fairly close to the all-time low of 1.11%, back in August of 2000. With many tobacco stocks offering a minimum of 3% dividends, it’s easy to understand why yield-starved investors want in.
The other big reason is stability. Typically, most astute investors avoid companies with extremely high dividends as this usually indicates major internal problems. However, tobacco stocks are secular investments, and have weathered multiple economic storms. And for better or for worse, tobacco’s consumer base is literally addicted to the products.
But with rising health concerns, and significant social stigmatization of smoking, tobacco stocks have faced unusual pressures recently. To address these concerns, many firms are turning to technology.
E-cigarettes, or vaporizers, have taken the smoking industry by storm, in part, due to their health claims. E-cigarette vapors are purer and cleaner than tobacco smoke, which relies on the combustion process. Their electronic cousins, in contrast, vaporize their smoking materials, and avoid the problems of combustion, such as carbon monoxide emissions.
The problem is that the e-cigarette experience is alien to traditional smokers. To fill this gap, tobacco firms are experimenting with their own digital products. These advancements replicate the “true” tobacco-smoking sensation. The result is an experience that more closely mimics the traditional platform, while still providing the alleged health benefits of vaporizers.
With this new development, the tobacco industry is setting up for another great year in 2017. Here are three tobacco stocks that will continue to light things up!
Tobacco Stocks to Buy: Philip Morris International Inc. (PM)
Philip Morris International Inc. (NYSE:PM) is one of the most elite names within tobacco stocks, so it’s quite telling that they’re making the shift to digital technologies.
Not to sound cynical, but the long-term trend of cigarette-smokers forced the issue. According to data provided by the Centers for Disease Control and Prevention, smoking has declined substantially for both adults and high school students since the 1990s.
To address both the declining interest and rising health concerns, PM has introduced four “smoke-free” products. These advanced cigarettes incorporate similar technologies found in today’s popular vaporizer platform. Additionally, Philip Morris is investing serious money into research and development, particularly to confirm the “smoke-free” products’ health benefits. Obviously, if such a connection could be made, it would have profound implications for Philip Morris.
The Food and Drug Administration has recently launched a scientific review into the health claims of electricity heated tobacco products. The study on EHTPs has a one-year timetable. If the markets are anything to go by, PM stock has increased by more than 2% since the May 25 announcement.
Apparently, investors are enthused, and who could blame them? Year-to-date, PM is sitting pretty at nearly 34%. The company also provides dividends with a yield of 3.4%.
Essentially, we have the perfect investment in PM — capital growth, passive income and a burgeoning consumer market!
Tobacco Stocks to Buy: British American Tobacco PLC (ADR) (BTI)
Philip Morris isn’t the only whale among tobacco stocks going digital. British American Tobacco PLC (ADR) (NYSEMKT:BTI), with a market capitalization north of $136 billion, isn’t taking the challenge lightly.
BTI has developed its own smoke-free products, which are also known as “heat-not-burn” cigarettes. Furthermore, it’s going after Philip Morris in one of the smoking capitals of the world, Tokyo, Japan.
The battle will not be an easy one. So far, Philip Morris has the early lead with its iQOS product, even beating out Japan Tobacco Inc. (OTCMKTS:JAPAF). However, BTI also has plans to expand into Osaka and Miyagi Prefecture. Later in the summer, BTI will attempt to launch their heated e-cigarettes into the South Korean market.
Despite the clash of the titans, the Japanese market should be big enough to accommodate everyone. Traditional smoking is declining, but a real hunger exists for healthier alternatives. Japan banned vaporizers that incorporate liquid nicotine, so this opens up the door to the heated devices. BTI expects that “Japan will make up as much as half of the world’s heat-not-burn market,” as reported by Bloomberg.
As with other tobacco stocks, BTI is currently riding on a strong wave of momentum. On a YTD basis, shares are up 27%. Dividends are a little light for the industry, but still carry a respectable yield of 2.94%.
Currently, BTI investors are enjoying the dual benefit of capital growth and steady yields. With an exciting new market in tow, I’d bet that the benefits will keep on rolling.
Tobacco Stocks to Buy: Vector Group Ltd (VGR)
Conceivably, they could churn out vaporizers that are designed for “herbal use.” If legalization falters, VGR has a robust business on the traditional end of the spectrum. Thus, I call it an “in-betweener” among tobacco stocks.
However, it’s impossible to deny that the environment for analog smoking is becoming increasingly difficult. Fewer smokers exist now than ever before, and advocacy groups are turning the tide of public opinion. However, the opportunity for VGR lies in the digital platform. Again, not to sound cynical, but American youth love vaporizers. If revenues decline for analog cigarettes, VGR has every incentive to further their digital portfolio.
The major headwind is if government agencies confirm the health benefits of Big Tobacco’s heat-not-burn devices. These products use nicotine to give smokers that traditional experience. By logical deduction, a vaporizer that doesn’t incorporate nicotine-based flavors would be deemed all the more safer. And studies confirm that young vaporizer users that have never smoked an analog cigarette overwhelmingly prefer non-nicotine flavors.
Although VGR does not have the capital to go toe-to-toe with the big boys, it can still reap significant rewards.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.