Why cigarette stocks Altira, Reynolds American are hot

Posted at 5:29 PM, Jul 29, 2015
and last updated 2015-07-29 17:29:51-04

NEW YORK — Cigarettes are bad for you. We all know that by now. But don’t tell that to Wall Street.

Marlboro maker Altria reported solid sales and earnings growth on Wednesday. The stock slipped a bit after the report, but shares are still up more than 10% so far this year and over 30% over the past 12 months. That’s much better than the broader market.

Altira’s top rival, Camel and Pall Mall owner Reynolds American, is doing even better.

Reynolds American just reported strong results on Tuesday. The company recently completed its merger with Lorillard, a deal that brought the Newport brand of cigarettes into the fold.

Shares of Reynolds American surged nearly 7% Tuesday to a record high. The stock is up more than 30% in 2015.

What gives? How can these companies be doing so well at a time when smoking has been pretty much demonized and some retailers — most notably CVS — have even stopped selling tobacco products?

Simply put, nicotine is an addictive drug. So Altria and Reynolds American have an awful lot of pricing power.

Those who haven’t yet kicked the habit are paying more for packs and cartons of their favorite cigarettes.

Both companies cited price increases in their earnings reports.

Altria said that the average price for a pack of Marlboros went up 13 cents from a year ago to $6.08. That’s about a 2% increase. Reynolds American executives said during a conference call with analysts that its prices were up about 6%.

An uptick in the job market and overall economy seems to be helping too.

Altria CEO Martin Barrington said in the company’s earnings call Wednesday that low gas prices are leading to higher sales as well.

“We know that the consumer, the adult tobacco consumer, began to feel better,” he said.

Reynolds American CEO Susan Cameron also pointed out that low gas prices were helping to drive demand.

Both companies are investing in the growing e-cigarette market as well.

Reynolds American owns the VUSE brand of vapor products. It sold its Blu brand to Imperial Tobacco in order to satisfy demands from regulators looking at the Lorilard merger.

And Altria owns MarkTen XL and Green Smoke. The company is also developing more e-cigarette brands with Philip Morris International, the company that sells Marlboro and other Altria brands worldwide.

Make no mistake. The tobacco industry is not one that is likely to ever post huge levels of growth ever again. This isn’t 1965.

But investors who don’t have a problem owning so-called sin stocks clearly appreciate the fact that the market is still a cash cow.

Sales are steady, if not spectacular. And the companies also reward investors with huge dividends too.

Altria and Reynolds American pay dividends that yield more than 3%. Philip Morris has a dividend yield of 4.7%. British American Tobacco, which owns more than 40% of Reynolds American, yields 5.5%.

And Vector Group, a smaller American cigarette company that owns the Pyramid and Eagle 20’s brands, yields a whopping 6.6%. Vector reports its latest earnings on Thursday. Its stock is up 16% this year.

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