From a top-down perspective, I think that the total number of tobacco users will actually rise worldwide into the future because of expected population growth. Cigarette companies like Philip Morris (NYSE:PM) have an extraordinary chance to capitalize, generate profits and to expand their reach and brand recognition. (Learn more in A Top-Down Approach To Investing.)
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Dividends And Estimates On The Rise
This past week the board upped the dividend from 54 to 58 cents. That's not gigantic, but it is certainly worth a good look. This isn't something PM's highly regarded board of directors would do on merely a whim. They had to be confident in the company's ability to pay that hefty quarterly dividend.
Right now, based upon the 54 cent dividend the forward yield is about 4.6%, which is big in this still lackluster macroeconomic environment. In addition, the company has beaten estimates four quarters straight, which is quite an achievement. The estimate for this year has gone up from $3.12 to $3.22 in the last 60 days, which is a good sign.
Finally, the company trades at 14.6 times this year's estimate, which isn't terribly cheap, but seems very reasonable for a company of its size, stature and reach in terms of potential customer base.
Other Smokes Worth A Puff
There are some other companies in this space that intrigue me as well. For example, Reynolds American (NYSE:RAI) trades at under 10 times this year's estimate and is expected to grow 5% per annum in the next five years.
Altria (NYSE:MO) is worth a look too. The Richmond-based company trades at 10.3 times this year's estimate, which is $1.74.
Finally, check out British American Tobacco (NYSE:BTI), which also trades at a pretty low multiple of expected earnings. It's trading near its 52-week high, and I think there's a chance it could reach a new high. (Can your principles make you richer or poorer? Find out if it pays pick your portfolio based on ethics, see Socially Responsible Investing Vs. Sin Stocks.)
The Bottom Line
If you don't mind playing sin stocks, the tobacco space could be very profitable. Philip Morris pays a nice dividend and it's estimate is on the rise.
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