Are Tobacco Stocks Still A Good Investment?

Tobacco Stocks

One category of investments that are popular with investors and have done well over the years are the Sin Stocks. These are investments in industries and sectors that are considered unethical or immoral, which include companies in alcohol, tobacco, sex-related, weapons manufacturing and military industries. This post will take a close look at the tobacco industry and presents some of the risk/reward considerations to keep in mind and evaluate: are tobacco stocks still a good investment?

I personally have no qualms about investing in the sin stocks for the sake of ethics, as any company that is worth its salt is probably stepping on other’s toes. The business world is brutal – and needs to be, in order to survive and be successful. Jason at Dividend Mantra had a post touching on this subject recently – entitled How Ethical Can an Investor Be? I agree with his points where he points to the questionable behavior of smartphone sweatshops and other industries. Same goes for the industries that most people consider benign, such as say, the food industry – if anyone takes the time to look into how animals are raised in our current conventional animal farming, it is truly horrifying. But that is a story for another post. Let’s jump into the subject of tobacco stocks.

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Dividend Comparison – Tobacco

Tobacco companies manufacture, market and sell cigarettes and other tobacco products. The tobacco giants have been cash cows for many investors as they pay hefty dividends and raise the dividends year after year. The tobacco customers, once hooked, are customers for life except for a small percentage of quitters.
tobacco
The major players in the tobacco industry are listed below.

Company Name Ticker Quote Mkt Cap P/E Yield 5-yr DGR
Altria MO $35.55 $71B 16.23 5.40% 14.30%
British American
Tobacco
BTI $107.57 $102B 16.48 3.95% 10.01%
Lorillard LO $45.11 $16B 14.03 4.88% N/A
Philip Morris PM $90.47 $146B 17.55 4.16% N/A
Reynolds American Inc RAI $49.96 $27B 18.15 5.04% 7.80%
Some tobacco companies listed above have massive amounts of debt. The debt/equity ratio for Altria (MO) is 4.17. Lorillard (LO) and Philip Morris (PM) have negative equity and as a result the debt/equity number remains meaningless. The book value/share for LO is -4.95 and PM is -3.37. The amount of debt and negative equity of these companies keeps me away, even though the the stockholders have been rewarded with a YTD performance of 17.56% (MO), 19.12% (LO), 10.25% (PM).
The other two listed tobacco giants have better and manageable debt – BTI with a debt/equity of 1.79 and RAI with a debt/equity of 1.10.

My Thoughts

The tobacco industry faces more challenges around the world – facing an increased resistance in marketing and sales of the product, litigation and acknowledgement from the public about the health risks associated. The western world taxes cigarettes highly (with the exception of US – although some states in the US tax cigarettes more than others) in order to get people to quit as it puts immense load on the public health system.
Some companies have had decent success by getting into the e-cigarette business and others such as Altira have diversified by producing and selling alcohol products. All things considered, I have decided to stay away from the tobacco companies for now and look for a better valuation in the future to invest in them.
Disclosure: None
Disclaimer: The information provided here is for educational purposes only. All opinions here are my personal opinions and should not be taken as financial advice. I am not qualified to be a financial advisor. Always consult with your financial advisor before investing in any of the companies mentioned on this blog.