Top Tobacco Stocks to Have on Your Radar

For decades tobacco stocks have produced huge amounts of cash for the companies. The cigarettes made by tobacco stock companies are very cheap to make. Due to the addictive nature of cigarettes, tobacco companies can charge a high price for them. In addition, tobacco stocks typically use their profits to pay dividends to shareholders.

Another attractive thing about tobacco stocks is that they’re defensive. In other words, smokers will still buy cigarettes even if the economy turns south. So, tobacco stocks don’t usually go down as much as stock market indexes in a downturn. Not only that, but tobacco stocks pay a dividend yield that can supplement your account as other stocks are tanking.

Health-conscious investors shun tobacco stocks, though. It’s widely known that cigarettes are very hazardous to smokers’ health. Executive running tobacco stocks are aware of the health issues caused by their cigarettes but keep making them anyway.

In addition, growth investors typically shy away from tobacco stocks because cigarette smoking has been in slow decline for many years. However, their income statements may not show it because the companies can raise prices to offset declines in cigarette volumes.

On the other hand, value investors tend to like businesses like tobacco stocks. Stocks with steady businesses, high cash flow, and generous dividends are a favorite for value investors. For the same reasons, investors tend to buy tobacco stocks when they think the stock market may be headed for a correction or bear market.

Tobacco stocks may be on your radar if you’re a value investor or think the stock market will keep heading in the wrong direction.

Tobacco Stock During a Recession

Despite the slow decline in cigarette smoking over the years, tobacco stocks are defensive. That means that the ups and downs of the economy don’t really affect the demand for cigarettes. For example, say you’re a cigarette smoker, a recession hits, and your family needs to tighten its budget. Where do you cut expenses? Dining out? Cut your gym membership?

In contrast, when a recession hits, folks may think twice about buying a big-ticket item like a new car or taking a vacation. Cyclical stocks in these sectors may get hit badly during a recession. Investors may sell cyclical stocks and buy defensive stocks like tobacco or other consumer staple stocks. Holding steady defensive stocks while the rest of the stock market tanks is one way you could beat the market in the short term.

The dividends paid to shareholders can also play a role in investment strategy. When investors receive the dividend from their tobacco stock, they can reinvest the cash into other stocks. The silver lining in a bear stock market is that many cheap stocks are probably available. Tobacco stock investors may be able to buy stocks in their favorite stocks at great valuations.

Best Tobacco Stocks to Buy

These stocks listed below are two defensive tobacco stocks that could outperform in a downturn.

No. 4 Altria (NYSE: MO)

MO has taken steps to diversify its business away from cigarettes. As the smoking rate in the U.S. has dwindled over the year, the company has used its profits to buy stakes in e-cigarette maker JUUL and Canadian cannabis company Cronos Group (Nasdaq: CRON).

Neither of Altria’s investments has done very well. For instance, after several rounds of litigation about health concerns of JUUL’s e-cigarettes, the company took a huge write-down of its stake in JUUL. In addition, Cronos Group’s market cap has fallen since Altria invested in the company.

On the Brightside for investors, Altria has a long history of paying a steady and increasing dividend. The stock currently pays a dividend yield of over 8.5%.

No. 3 Philip Morris International (NYSE: PM)

PM is a spin-off from Altria. It sells many of the same cigarette brands as Altria, but the sales come from outside the U.S. Another similarity is that Philip Morris has tried to diversify its cigarette business despite declining smoker rates. For instance, the company has a stake in heat-not-burn tobacco company IQOS.

IQOS devices use tobacco instead of the liquid used by e-cigarettes. So, Philip Morris can use its tobacco supply chain to sell the cartridges used in its devices. Keep in mind, though, that the FDA is investigating the cigarette alternative and has not said it is safer than cigarettes. Philip Morris stock pays a dividend yield of 5%.

Two Best Tobacco Stocks in a Recession

These two tobacco stocks could hold up and keep paying their dividends during a recession. Let’s take a closer look…