Tobacco Stock Dividends are Safe

Tobacco stocks have taken a big hit over the last 12 months but analysts think that the dividends are safe for at least a few years

Philip Gorham 29 January, 2019 | 2:28PM
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Phil Gorham: Tobacco valuations have taken a big hit over the last 12 months with large-cap global players Phillip Morris International (PM) and British American Tobacco (BATS) down 30% and 50% respectively. Dividend yields are now at a very attractive range in the high single digits, and although we think dividend growth is likely to slow to the low single digits over the next few years, we do think the the dividends are safe and this represents a buying opportunity for investors. 

Investors have been concerned about two things. First, the more assertive approach by the FDA to regulating the industry with proposed measures including a potential ban of menthol flavourings and even a reduction in nicotine levels. And the other thing investors are concerned about has been the recent weakness in the performance of the heated tobacco category in Japan.

Iquos, PMI's popular heated tobacco device, will be making its way to the US soon - perhaps this year - and investors that were hoping that heated tobacco would pick up the slack of falling cigarette consumption have been disappointed by a sudden slowdown and growth of the product in Japan. 

On the regulatory front, the FDA's proposed measures are a risk, but the market has assumed the worst-case scenario, and we think that even in the event of a menthol ban, some smokers would switch to non-menthol cigarettes as has happened in Canada, since it banned menthol in October 2017. In terms of the heated tobacco category, history tells us that disruptive consumer goods rarely follow a straight-line growth path and that adoption happens in stages.

Investors are overlooking the fact that products coming in the pipeline, including a disposable version of Iquos, could solve some of the issues with first generation devices that have not, so far, appealed to the late adopters in the market. If this happens, we think revenue, earnings, and of course, dividends, can grow for longer than is currently being priced into the stocks.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
British American Tobacco PLC2,700.00 GBX-0.18Rating
Philip Morris International Inc119.39 USD-0.66Rating

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Philip Gorham  

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