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Dividend Investors Shrug Off Mayor Bloomberg's Anti-Smoking Campaign

By Rich Smith – Apr 8, 2013 at 7:00PM

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The NYC mayor wants to hide cigarettes from customers. Investors couldn't care less.

On March 18, New York Mayor Michael Bloomberg asked his city council to outlaw the public display of cigarettes for sale. If the Democrat-dominated council complies, it will soon become illegal in New York City for vendors of smokes to show customers their wares. They'll have to be hidden from plain view -- stored in cabinets or under counters, for example. Yet it appears that dividend investors invested in smoking stocks don't see a problem with that.

Already, Bloomberg has pushed through laws raising taxes on tobacco and banning smoking in restaurants and bars, and even in outdoor parks. As for this latest initiative, when asked about Bloomberg's move last month, City Council Speaker Christine Quinn pronounced herself "very, very open" to the idea.

So why aren't tobacco stocks suffering?

Dividend investors still hot on smokes
Since news of Mayor Bloomberg's proposal broke, shares of tobacco industry bellwether Altria Group (MO 1.32%) are up nearly 5% in value. Lorillard (LO.DL) and Reynolds American (RAI) are up 4.2% each, and even British American Tobacco (BTI 0.98%) has notched a respectable 3.4% gain.

There are probably two reasons for this -- maybe two and a half.

Hey, New York: Get over yourself
First and foremost, it's not as if the New York market is the be-all and end-all for these companies. "Gotham" it might be, but America's most populous city is still just one city, and most of these companies sell across the country and around the globe. So any decrease in tobacco sales caused by a new point-of-sale display ban will only dent the companies' revenue streams -- not dry them up entirely. What's more, even in NYC, cigarettes will still be available for sale. They just won't be visible.

The other important factor buoying tobacco stocks among dividend investors is the valuations attached to these companies' shares.

Buy discount cigarettes here
After all, tobacco stocks weren't particularly pricey to begin with, giving them some room to run. If your average stock on the S&P 500 today costs a bit more than 14 times forward earnings to purchase, then all four of these stocks charge less than that. Altria, Reynolds, and BAT all sell for about 13 times earnings and change. Lorillard is a relative bargain at just 12.1 times forward earnings.

And of course, the real attraction of these stocks is their generous dividend payments. From a very respectable 2.5% dividend yield at BAT -- two-tenths of a percent more than the average S&P stock pays -- dividend yields among this group of stocks quickly rocket up the scale to Altria's premium 5.1% yield, to 5.3% at Reynolds, and a whopping 5.4% at Lorillard.

Like a nice, long drag on a smoke, there's nothing quite like a big, fat dividend yield to ease investors' worries when Big Government tries to stress 'em out.

Fool contributor Rich Smith and The Motley Fool have no position in any of the stocks mentioned. 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.

Stocks Mentioned

Altria Group Stock Quote
Altria Group
$47.63 (1.32%) $0.62
Reynolds American Inc. Stock Quote
Reynolds American Inc.
Lorillard, LLC Stock Quote
Lorillard, LLC
British American Tobacco Stock Quote
British American Tobacco
$42.31 (0.98%) $0.41

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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