Graphic Color Anti Smoking Pictures to Appear on Cigarette Packs: Future of Tobacco Stocks

On Friday, November 12, 2010, the Department of Health and Human Services announced in the Federal Register Volume 75, Number 218 the proposed rule called 'Required Warnings for Cigarette Packages and Advertisements.' As part of the proposal, the Federal government came out with a series of graphic, colorful picture warnings that would appear on the upper half of the top of the pack.

Many of these warnings are very disturbing, featuring such pictures as dead bodies, a man blowing cigarette smoke out of the hole in his throat, a mouth with lip cancer, etc. If you want to see a slide show of about a dozen of the proposed warnings, click HERE. Although the implementation isn't for a couple years out, it is bound to have some effect on future US sales.

Some tobacco companies offer incredibly high yields. Part of the reason for this is due to the stock trading at what I call the 'bad stock discount.' This discount comes about because many individual and institutional investors avoid the so-called sin stocks, also known as vice stocks. These companies can include such industries as gambling, alcohol, and adult businesses. But tobacco and cigarettes seem to be on top of the vice list. With fewer potential buyers of the stocks, the stocks trade lower that what other stocks would with similar financials and similar dividend payouts but non-vice businesses. The lower stock price causes the payout to reflect a higher yield. In addition, tobacco companies need to pay a higher payout in order to attract investors who would initially not look for a cigarette company stock.

Of the ten companies involved in tobacco in some way, eight of them pay dividends ranging from 2.7% to 8.4%. One of those stocks is Lorillard, Inc. (LO), a cigarette manufacturer with 41 brands including Newport, Kent, True, Maverick, and Old Gold. The company has been around since 1760; that's 250 years. The stock pays a yield of 5.1% and trades at 12 times forward earnings. The company's primary market is the United States, so it may be more affected by the upcoming warnings.

Philip Morris International, Inc. (PM) sports a forward price to earnings ratio of 14 and a yield of 4.3%. The company's brands include Marlboro, Merit, Parliament, Virginia Slims, L&M, Chesterfield, Next, and Philip Morris. The new US cigarette warnings shouldn't have any effect on the stock as its market is outside the US, including Canada, European Union, Russia and Eastern Europe, the Middle East, Africa, Asia and the South Pacific, and Latin America.

Universal Corp. (UVV) is a company that is not often mentioned in the financial press. The company, based in Richmond, Virginia, is a leaf tobacco merchant and processor which operates worldwide. The stock has a PE ratio of 8 and a yield of 4.3%. Its tobacco is used primarily for cigarettes, but also for cigars and smokeless tobacco products.

You can access a free Excel list of all the high yield tobacco stocks, which can be downloaded, sorted, and updated, at WallStreetNewsNetwork.com.

Disclosure: Author didn't own any of the above stocks at the time the article was written.

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