Tobacco stocks zoomed today on a court victory for Philip Morris parent Altria Group
The Illinois Supreme Court reduced the bond Altria must post while it appeals a $10.1 billion decision citing misleading claims for light cigarettes. In the three-level Illinois state court system, a trial court first imposed a $12 billion bond but later reduced it to $6 billion. The next level appeals court reversed the reduction, and now the Illinois Supremes have reversed that -- bringing Altria around to $6 billion again. And that's as high as it goes.
Altria stock has bungeed on each decision, and today's surge reflects investors' belief that there is now little or no risk of bankruptcy specifically from the bond. But there's still risk if the company has to someday pay the full judgment.
The news at R.J. Reynolds is less the litigation risk affecting tobacco companies than competition from generic and cheaper brands. The company said it would cut 2,600 jobs, or 40% of its workforce, in an effort to save $1 billion by the end of 2005. Investors who are enamored of the company's 11% dividend hope that cost cutting will leave more free cash flow to fund it.
It's been quite a week for tobacco, with a mostly favorable decision from a federal court in Chicago also boosting the sector. The court upheld a trial court's rejection of HMO claims for tobacco-related health-care costs, but ordered the court to reconsider the HMO request for an order stopping false and misleading advertising.
All four of the stocks mentioned above have nice dividend yields -- Altria, 6.7%; R.J. Reynolds, 11.1%; British-American Tobacco, 3.8%; and UST, 5.8%. If that sounds interesting to you, you'll want to take a look at Mathew Emmert's Income Investor.
