Altria Group Inc (MO), Lorillard Inc. (LO), Reynolds American, Inc. (RAI): Why You Should Include These Tobacco Companies in Your Portfolio

Stay away from the mall

Reynolds American, Inc. (NYSE:RAI) is the least attractive among these companies. Offering limited growth prospects while trading at 18 times its earnings, at about a 12% premium to the industry average, this does not look like a good investment. However, due to a dividend yield of 5%, some analysts have considered a buy recommendation.

In my opinion, Reynolds American, Inc. (NYSE:RAI) is a hold for now. Despite holding the second position in the U.S. tobacco market and 50% of the top ten brands,its valuation discourages me from buying this stock. In addition to the declining demand and increasing regulation and restrictions on smoking, the company faces strong competition from Altria Group Inc (NYSE:MO), which has implemented an aggressive marketing campaign that has put considerable pressure on Reynolds American, Inc. (NYSE:RAI)’ margins and will most likely impact its main brands’ (Pall Mall and Camel) market shares. In addition, the firm holds one of the oldest customer demographics in the industry; this will further limit its growth in the years to come.

Nevertheless, I’d advocate on keeping a close eye on this firm since a drop in its stock price could open an attractive opportunity for dividend investors. Furthermore, Reynolds American, Inc. (NYSE:RAI)’ trend towards innovation, its strong positioning in the super-premium segment (through its Natural American Spirit brand) and its strong e-cigarette segment could provide more upside than expected.

Bottom line

Combining strong, moated, long-standing businesses with addictive product offerings and some opportunities for growth, Altria andLorillard Inc. (NYSE:LO) look like attractive investments for the long-term. However, what really drew my attention are their dividend yields. If you are looking for a secure investment that will continuously reward shareholders through regular dividend payouts, these companies are the way to go.

The article Why You Should Include These Tobacco Companies in Your Portfolio originally appeared on Fool.com and is written by Victor Selva.

Victor Selva has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Victor is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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