A Smoking Gun For Smoking Stocks
Some persons love standing on a moral high ground (including, most likely, many of your relatives) while others care more about real-world results than they do ideology. If you invest with value and growth as the sole interest, you can find plenty to appreciate in today's tobacco market, where the popularity of e-cigarettes has helped to revive a flagging sin industry and provide Americans with one of their favorite legal drugs. Few businesses protect their cash flow quite like tobacco companies, who make every effort to entice repeat customers while branching out into new markets. That makes certain smoking stocks into strong choices for any portfolio.
A History Of Strong Performance
Tobacco doesn't represent a foolproof investment, though there's yet to be a major challenge to its market share. Tobacco use actually increases during poor economic cycles despite the high costs associated with the end product (a pack averages $5.50 across the US, with highs of $14 in New York state) thanks to the economics of "affordable pleasures", happy to buy smokes in lieu of a vacation or a new car. The largest companies in the US average around a 4% return on a year-by-year basis with surprisingly little volatility. While poor weather can kill a harvest of cocoa or coffee, tobacco has much better resistance to cold and drought, allowing it to be grown through most parts of the American south that get enough sunlight. While the US served as ground central for tobacco growth for most of the past 400 years, in the past decade China has lapped the field and now grows 3.2 metric tons per year, more than the rest of the world combined. Nevertheless, it's the American companies that profit from the influx of cheap tobacco. While American tobacco use has declined in the past decade overall, global consumption has grown, while higher prices here at home have offset any problems with the customer base.
Only McDonalds can claim to have directly caused more American health concerns in its history of operations than Phillip Morris. Phillip Morris (PM on the New York Stock Exchange, trading for $83.14 a share) has as much operating income, some $14 billion, than the next two competitors on this list combined. Since they've heavily invested in foreign markets over the past half-decade, the surge of the dollar index hasn't been kind to their bottom line since 2012, without any net growth. That may make even a fairly non-conservative investor leery, but the long-term gains of Phillip Morris speak for themselves, having tripled in value between 2009 and 2013. Phillip Morris represents a solid choice for long term growth since they have the unique ability to raise their dividend while maintaining good cash flow, since the former represents only seventy percent of the latter. Their growth isn't likely to be significant, but is almost certain to provide an annual payout at or near 5%.
If you abide by the principle that slow and steady wins the race, you'll love everything that Altria has to offer investors. Altria (MO on the New York Stock Exchange, trading for $51.23 per share) will likely never hit that delicious upwards slope but will continue to grow upwards and to the right. Altria's stock price history defies almost every categorization: it grew tenfold between 2002 and 2007 then got positively clocked by the spin-off from Phillip Morris, dropping from $70 per share to $22 per share overnight. After stabilization, it's been smooth sailing for Altria, having only once dropped by greater than 10% in value over a four-week spread just once since 2009. Their dividend as a portion of cash flow is one of the highest of all tobacco companies at 84%, meaning that they're hampered in terms of significant growth but have one of the strongest customer basis in the industry. Altria represents a fantastic choice for a stock you can invest in, effectively forget for a decade or two, and be happy with the final result once you decide to cash in the chips down the line.
If there's a wildcard in the US tobacco industry, you can be certain that it goes by the name of Reynolds American (RAI on the New York Stock Exchange, trading for $77.13 a share). That's because they're willing to take far greater risks than their competition, headlined by their acquisition of Lorrilard in 2014. That move alone gave Reynolds a 20% bump in the span of less than a month. With that move, Reynolds controlled the 2nd, 3rd, and 4th largest cigarette brands in the United States (Camel, Newport, and Pall Mall, respectively). Reynolds hasn't been shy about raising the price tag on their product in order to pay better revenue, either: since 2008 their overall cigarette shipments have dropped by nearly a quarter, while revenue has only dipped by 4% and their stock price has doubled. Reynolds proved to be one of the only losers of the Great Recession, experiencing loss of over 50% from 2007 to 2008, but they've bounced back in a big way. What's more, they've been the biggest investor in the new trend of e-cigarettes, spearheaded by their VUSE brand. The popularity and novelty of e-smokes has helped the stock to climb with almost no interruptions since 2011, gaining six percent annually while paying a forward annual dividend yield of 3.5%. While that figure represents a smaller margin than its larger competitors, it also represents a solid amount of room to grow. Investors who are willing to take on this riskier stock (beta of .58) should do so as soon as possible, as the shares have been steadily climbing throughout 2015, growing by 20% in the past six months.