My Favorite Sin-vestment Pays 5.8%
I’m writing you from the first day of the MoneyShow TradersEXPO in Las Vegas. I figured since I’m in Sin City I have to talk about my favorite sin-vestment to keep on your radar.
I consider alcohol, tobacco, and gambling to all fall in this category.
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One thing about vice stocks: They can be as recession resistant as consumer staples.
Even when the economy is heading to hell in a handbasket, consumers looking to tighten the purse strings will cut just about everything else before they stop drinking, smoking, and betting. In fact, consumption of vices will often head higher as people feel more stressed due to economic pressures.
In our current Yield Shark portfolio, we have both gambling and tobacco stocks with yields above 5%. Although I haven’t had a drink for over 10 years, rest assured I’m always looking for the right time to add an alcohol company to our holdings. But there hasn’t been a good opportunity to do that in quite a while.
Today, we’re going to take a look at big tobacco.
Tobacco Giants Pay Hefty Dividends
There are really only four tobacco names to consider: Imperial Brands (IMBBY), British American Tobacco (BTI), Altria Group (MO), and Philip Morris International (PM). These bad boy stocks yield 7.8%, 9.7%, 9.7%, and 5.8%, respectively.
Imperial is the giant behind the Kool, Winston, and Zone brands. British American Tobacco is the owner of Lucky Strike, Pall Mall, Camel, American Spirit, and Newport. Altria Group owns Black & Mild Copenhagen and Skoal, as well as Philip Morris combustibles in the US. Philip Morris International is the parent of Marlboro, Parliament, Virginia Slims in the rest of the world, plus IQOS smoke-free products and ZYN nicotine pouches.
Whether you smoke or not, I know you will recognize many of those iconic brands. And brand loyalty—as it is for things like sport shoes and soft drinks—is a big motivator behind consumer spending on tobacco. However, it’s pretty obvious that how nicotine is consumed is changing as we see a switch to vapes and pouches.
My favorite tobacco company has been aggressively targeting the smoke-free segment of the market for years. Staying in front of this trend has given them a competitive edge. PM is the only one of the four that has grown its revenues every year for the past three years.
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It’s also the only one whose share price is higher today than it was 5 years ago.
During that time, IMBBY is down 32%, BTI is down 16%, and MO is down 15%. Shares of PM are up 7.5%.
Sure, you could counter that PM pays the lowest dividend yield of the group. But that’s just the product of simple math. As a stock’s price falls, its yield rises. And that doesn’t mean they are good investments—especially long-term.
Move Over Marlboro Man—The Future of Tobacco
PM has been working toward a smoke-free future for several years. Its goal is to earn more than two-thirds of net revenue from smoke-free products by the end of 2030.
In the fourth quarter of 2023, PM’s smoke-free products reached nearly 40% of total net revenues and over 40% of gross profit. This was led by its IQOS heat-and-burn brand which has now surpassed Marlboro in terms of new revenues.
The ZYN nicotine pouch brand also had a great first year in the PM family and achieved exceptional growth. It’s the fastest-growing US smoke-free brand.
PM’s fourth-quarter net revenue was $9 billion, up 8.3% from last year. Smoke-free product net revenues were $3.6 billion, up 13.6%. Adjusted EPS came in at $1.36.
For the full year, net revenue was $35.2 billion, up 7.8% from 2022. This is the third straight year of high-single-digit growth. The smoke-free segment's share was $12.8 billion, up 12.8%. Adjusted EPS was $6.01.
Looking ahead, PM expects sales of its smoke-free products to continue higher. Management projects full-year adjusted EPS in 2024 of $6.32‒$6.44. That would be growth of 5.1‒7.1% over 2023. Net revenue is forecast to grow between 6.5‒8%. Again, another year of high-single-digit growth.
I’m bullish on the future of tobacco consumption. Some of these other companies might be worth adding over the short term to the Current Yield section of your portfolio. But for a long-term tobacco holding, Philip Morris (PM) is the way to go. I like shares up to $104.
For more income, now and in the future,
Kelly Green
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