Editor’s note: This story was previously published in September 2018. It has since been updated and republished.
In many respects, the top tobacco stocks defy logic. The Surgeon General’s Office released its warning about the dangers of tobacco in 1964. Despite a sustained anti-smoking crusade, tobacco stocks continued marching higher. As the climate at home became more hostile, these firms also found new customers overseas.
These firms also found other sources of revenue. The latest new source for tobacco stocks? The cannabis industry. Long illegal throughout the world, marijuana continues to gain both acceptance and legal status. Moreover, anyone who pays even scant attention to business news knows marijuana stocks continue to rise. This industry could easily become a new profit center for tobacco companies. Furthermore, tobacco companies know how to navigate the hostile regulatory climate cannabis will face, particularly in the United States.
Whatever direction the tobacco industry takes, I would not bet on its decline despite the negative public image of cigarettes. With new product lines and creative marketing, I think the following top tobacco stocks should continue to perform well.
Altria Group, Inc. (MO)
Perhaps no large company defines the top tobacco stocks more than Altria (NYSE:MO). Altria manages to keep profits moving higher, despite its core product’s falling popularity. The parent company for brands like Marlboro (in the U.S.) and Parliaments has also emphasized so-called “reduced risk products” such as smokeless tobacco. Moreover, it could profit further if the FDA approves IQOS, a smoke-free cigarette popular in other countries. And, like its counterparts in the beverage industry, Altria has also explored investing in cannabis.
All of this will serve to benefit those who want the generous levels of dividend income that MO produces. This track record of payouts goes back decades. Investors who bought in the fall of 1985 and held now make their original investment back every year in dividends alone. For those who reinvest dividends, investors who bought in the spring of 2003 now have achieved the same feat.
The company will occasionally pay an outsized payout followed by a dividend reduction. Still, the dividend has risen annually for the last 10 years. Investors buying today will still enjoy a yield of 5.1%.
Continuing to pay this dividend should not be an issue in the future either. Analysts predict profits will increase by 6.2% this year. They also project an average of 10.1% annual growth over the next five years. Current earnings also place the forward price-to-earnings (P/E) ratio at 11.4.
That allows investors to buy into this generous dividend stream at a discount. Given MO’s ability to mitigate the negative sentiment surrounding tobacco, and its potential in the cannabis industry, I think these benefits will accrue for years to come.
Philip Morris International, Inc. (PM)
Philip Morris International (NYSE:PM) spun off from Altria in 2008. As the name implies, it operates primarily outside of the U.S., despite the Manhattan address of its headquarters. Among top tobacco stocks, it remains best known for retaining the right to market Marlboro cigarettes outside of the U.S. (Altria holds the U.S. rights).
While it remains a similar company to Altria in many respects, the non-U.S. focus gives it the advantage of not having to deal directly with federal regulation. As a result, it has led the way in IQOS in other countries. Its non-U.S. focus also gives this company an advantage over Altria if it wants to make deals with cannabis companies.
Due to its offshore focus, Phillip Morris International now exceeds the size of its original parent company. It holds a market cap of about $121 billion, slightly larger than Altria’s market cap of about $90 billion. The forward P/E of 14.8 comes in somewhat higher than Altria. However, with its five-year average PE of 20.3, it usually trades at a slight premium to its former parent.
On the dividend front, it lags the long-term history of Altria, but little else. This payout has risen every year since the company’s 2008 spinoff. The recent increase takes the annual dividend to the equivalent of $4.56 per share, a yield of over 6%.
Despite the accolades, the PM stock price has fallen steadily since achieving a high of $122.90 per share in June 2017. It now trades almost 33% below this level. However, with its generous dividend, I think it presents a buying opportunity. If Phillip Morris International enters the marijuana business, investors can profit from both a high payout and hopefully, a rising stock price.
Universal Corp. (UVV)
Universal Corporation (NYSE:UVV) operates in a different segment than other top tobacco stocks. The company processes tobacco. It buys the plant directly from producers, refines it, and then sells it to product manufacturers.
Given the overall decline of tobacco use throughout the world, I would typically take a cautious view on such a company. However, the company processes other products besides tobacco.
Potentially, Universal could revive its fortunes by making a modest pivot into cannabis. Since it already processes other products, shifting into weed should not create any major operational shifts. Moreover, it also controls a supply chain useful for both procuring and distributing its product. This supply chain extends to over 30 countries on five different continents.
Although the company has yet to announce such a move, investors may already have noticed this potential. UVV stock shot higher in the middle of last year as its operating income rose despite its falling sales. The stock subsequently lost most of its mid-2018 gains.
The company remains small, as UVV’s market cap is around $1.4 billion.
Its current P/E to about 12, while its dividend stands at $3 per share. This amounts to a yield of 5.4%. It has raised its dividend for 46 consecutive years.
As a smaller company that processes tobacco, Universal might seem like a strange pick at first glance. However, its varied product base, small size and large dividend make UVV stock an intriguing play among top tobacco stocks.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.