Tobacco companies were getting their butts kicked. Cheap imported smokes were cutting margins. Litigation's tab kept mounting. If it weren't for the high dividends, would anyone other than fiscal rubberneckers even look at this sector?
That's why R.J. Reynolds' (NYSE:RJR) bid for British American Tobacco's (NYSE:BTI) stateside operations is brilliant. No, Reynolds' putting up $2.6 billion in cash and stock for a 58% stake in the combined company won't solve all the industry's problems, but it certainly won't hurt.
If you can't collude, consolidate. With Altria (NYSE:MO) now the other guy, the three domestic tobacco leaders will become two. That won't stop the shipment of inexpensive cigarettes from overseas or help throw the scent off health-related litigation; however, it should make it easier to resist dabbling in pricing wars.
Still, folks who bought into the sector chasing puffy payouts need to be careful. The average yield of the three tobacco players is 6.5%, but readers of our Motley Fool Income Investor know that you can't always judge an income investment by the size of its quarterly distribution. The sector's turnaround is still hazy and investors are best served by waiting for the smoke to clear.
Have you been tempted by tobacco stocks given for their high yields? What about the many other investment vehicles offering attractive payouts? All this and more -- in the Investing for Income discussion board. Only on Fool.com.
