Tobacco Stocks: Smoke ‘Em If You Got ‘Em

By Traders Huddle | May 22, 2012 AAA

Plenty of judgment can be passed on the habit of tobacco consumption and the reality is the habit has been proven to be toxic to one's health. Fortunately, one does not have to smoke to reap the rewards of tobacco stocks. Tobacco stocks are really the epitome of "sin stocks," though the infamy their products have gained for being so unhealthy is arguably unfair compared to the likes of McDonald's (NYSE: MCD) and Coca-Cola (NYSE: KO).

Both of those companies hawk products that can lead to myriad serious health problems and both firms and their nearest rivals have certainly contributed to a serious obesity epidemic in the U.S. that costs the country billions of dollars in lost productivity every year. Still, tobacco stocks are seen as far more evil than hamburger or soda companies.

Well, tobacco stocks aren't evil for investors and an investor doesn't need to engage in the habit to profit from it. Think about tobacco stocks this way: Let someone else enjoy the habit while you enjoy your dividends and capital appreciation.

Philip Morris International (NYSE: PM):

Philip Morris International is the international version of the former Philip Morris. Altria (NYSE: MO) is the firm that's more focused on domestic tobacco markets. The returns offered by both stocks in 2012 are almost identical, but long-term investors, of which the tobacco sector attracts many, might want to consider PM over MO.

The reason for that is simple and it involves one key fundamental. PM's international exposure will be an important driver of growth in the coming years. Smoking is vilified here in the U.S., but in other countries, particularly fast-growing emerging markets, smoking is seen as a glamorous status symbol.

Japan Tobacco (PK: JAPAF):

Don't worry about the fact that Japan Tobacco trades on the pink sheets. It's actually quite common for large foreign companies to seek a U.S. listing on the pink sheets as a way of saving money. If it makes you feel any better, Nestle (PK: NSRGY), the world's largest food company, is also listed on the pinks.

The company is of course dominant in its home country, another place where smoking is far more widely accepted than it is here in the states. Japan Tobacco also recently said it would consider emerging markets acquisitions in Asia and Latin America to boost its global profile.

Vector Group (NYSE: VGR):

With a market cap of just $1.3 billion, Vector Group fits the bill as a small-cap stock, but this not a fly-by-night operation as the company has been in business for 140 years. Vector's brands are not as recognizable as Camel or Marlboro, but the shares yield almost 10%, by far the highest in the tobacco group and that's saying something because tobacco stocks are prized for their dividends.

As a small-cap, Vector Group is more volatile than say Altria or Philip Morris and in a market environment where small-caps are being punished, patient investors might want to wait on Vector Group as better pricing (and a higher yield) could materialize in the coming weeks.

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