3 Dividend Stocks in Serious Trouble

The recent decision by CVS Caremark to stop selling tobacco products threatens to jeopardize the high yield at companies such as Reynolds American, Altria, and Lorillard.

Feb 9, 2014 at 3:03PM

Rai

Three of the highest-yielding dividend stocks on the S&P 500 (SNPINDEX:^GSPC) have found themselves in dangerous crosshairs yet again.

On Wednesday, the nation's second largest pharmacy chain, CVS Caremark (NYSE:CVS), announced its decision to stop selling tobacco products by the beginning of October. The move served as a direct affront to the nation's largest tobacco companies, Reynolds American (NYSE:RAI), Altria (NYSE:MO), and Lorillard (NYSE:LO).

"The significant action we're taking today by removing tobacco products from our retail shelves further distinguishes us in how we are serving our patients, clients, and health care providers and better positions us for continued growth in the evolving health care marketplace," said CVS's president and chief executive officer, Larry Merlo.

After the decision was announced, no less than President Obama publicly endorsed it:

I applaud this morning's news that CVS Caremark has decided to stop selling cigarettes and other tobacco products in its stores, and begin a national campaign to help millions of Americans quit smoking instead. As one of the largest retailers and pharmacies in America, CVS Caremark sets a powerful example, and today's decision will help advance my administration's efforts to reduce tobacco-related deaths, cancer, and heart disease, as well as bring down health care costs -- ultimately saving lives and protecting untold numbers of families from pain and heartbreak for years to come.

To be fair, the move isn't likely to have an immediate impact on Reynolds, Altria, or Lorillard. According to an analysis by The Wall Street Journal, drugstores like CVS accounted for only 4% of cigarette sales in 2012. The vast majority were sold instead at gas stations, which had a market share of 48%, and tobacco specialists, with a market share of 21%.

At the same time, it's impossible to deny that CVS's decision is yet another chink in the tobacco industry's armor. Among other things, it adds to the growing list of retailers that are steering clear of the market. Target abandoned the business in 1996, and Wegmans Food Markets, a privately owned food-store chain on the East Coast, discontinued it two years later.

The big question now is whether Wal-Mart, the world's largest retailer, will follow suit. The chain has contemplated doing so in the past but decided against it in light of the money involved. "There are still a tremendous number of our customers who smoke," Wal-Mart's former CEO, Lee Scott, said five years ago. "We've got a market to serve, and second we've got shareholders to think about."

While it's impossible to predict when this calculation will change in the favor of the health of Wal-Mart's customers, what's less controversial is that the inevitable decision will serve as a potent omen for the tobacco industry, as Wal-Mart's tacit endorsement represents more than mere market share. In short, it would be a public-relations disaster for Reynolds, Altria, and Lorillard and would weigh heavily on these companies' shareholders.

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John Maxfield and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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