Many investors choose not to invest in tobacco companies, for a variety of reasons. One of which is the constant threat of litigation and encroaching government regulation. Since tobacco is a product that is harmful to our health, the popular argument against tobacco stocks is that the government is always liable to implement punishing regulations that have the potential to cause material, long-lasting damage to the nation’s biggest tobacco companies.
In April, this threat was renewed yet again when the mayor of New York City, Michael Bloomberg, brought forth proposals to further restrict smoking in his city. Should tobacco investors rush for the exits on this news? Are Altria Group Inc (NYSE:MO), Reynolds American, Inc. (NYSE:RAI), and Lorillard Inc. (NYSE:LO) investors wise to dump their stocks now, so as to not be left holding the bag when the dust settles?
Beware the health-conscious consumer
It’s no secret that smoking is harmful. The public is widely aware of the damaging health effects of smoking, and as a result, health advocates such as Mayor Bloomberg have taken the offensive. His latest plan is to increase the legal smoking age from 18 to 21.
Previous efforts have been made to reduce smoking, particularly among young people, including banning tobacco companies from advertising and prohibiting smoking in public places in many metropolitan areas.
The fruits of these endeavors are evident. According to a Gallup poll taken last August, only one in five adults in the U.S. smokes, representing the lowest percentage since 1944.
These initiatives and the decline in smoking rates is having an undeniable effect on big tobacco. Reynolds American, Inc. (NYSE:RAI), maker of Camel, Pall Mall, and Natural American Spirit cigarettes recently reported quarterly revenue dropped 3% year over year.
Further, Reynolds American, Inc. (NYSE:RAI) has struggled over the last couple years. Revenue has declined for two years in a row, with full-year 2012 sales dropping almost 3%. Even worse, diluted earnings per share fell almost 7% in 2012 year-over-year.
Lorillard Inc. (NYSE:LO) is a much smaller competitor, with a market capitalization of $15 billion that has seen its share of difficulty lately. The company offers the Newport and Kent brands, and in February reported decent, if unspectacular, full-year 2012 results. Revenue and diluted earnings per share increased 2.4% and 5.6%, respectively.
Altria Group Inc (NYSE:MO), on the other hand, has performed admirably over the same period. Plainly stated, Altria’s full-year 2012 results were simply better than the results of its closest peers. Altria Group Inc (NYSE:MO) reported full-year revenue increased 3.5% and revealed impressive diluted earnings per share growth of 25% versus the prior year.
Light up the best of the bunch
Calls for the end of tobacco have been made for several decades. While smoking rates are declining, the fact remains that big tobacco companies are as profitable as ever. This is due to tobacco companies charging higher prices for cigarettes, in conjunction with the push to alternative products such as smokeless tobacco.
Smoking rates will probably hit a bottom, as it’s unreasonable to think that cigarettes will disappear entirely from our society. And while government intervention is a constant concern, it’s unlikely that state and local governments would be foolish enough to destroy the excise taxes they depend upon.
It’s safe to say that for the foreseeable future, tobacco stocks will do what they have done for decades: produce consistent profits and return the vast majority of those profits to shareholders via dividends. In that vein, there’s no better example over time than Altria Group Inc (NYSE:MO). Wharton economist Jeremy Siegel noted in his book The Future for Investors that Altria, formerly Philip Morris, was the top performing stock from 1925 to 2003.
Altria Group Inc (NYSE:MO) is one of only three companies in the S&P 500 Index whose total shareholder return has exceeded the S&P 500’s return every year for the last 12 years. While each of these stocks offers dividend yields in excess of 5%, Altria is the market leader. The company’s flagship Marlboro brand holds half the cigarette market share in the United States. Investors interested in tobacco should pick the clear industry leader: Altria Group Inc (NYSE:MO).
The article Can Big Tobacco Survive Additional Regulations? originally appeared on Fool.com is written by Robert Ciura.
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