U.S. cigarette stocks were having a good day on Monday, with the S&P 500 tobacco index up 2.2 per cent - its biggest one-day gain in more than six weeks. The reason: The U.S. Supreme Court refused to review a previous conviction against the industry.
Curiously, both the tobacco industry and the U.S. government are disappointed with the ruling. For the industry, it means that it is now stuck with those racketeering charges, related to deceiving consumers about the risks of smoking. And for the government, it means that its dream of getting tobacco companies to cough up up to $280-billion (U.S.) in profits are gone.
Investors see more upside than downside here. (Full disclosure: I'm one of them. I own shares in Altria Group Inc. and Philip Morris International Inc. ). After all, the downside is a worse reputation - but the reputation among tobacco companies was never anything to brag about anyway.
That is, unless you're talking about a reputation for paying out handsome dividends and maintaining profitability. The four stocks in the S&P 500 tobacco index - Altria, Philip Morris, Reynolds American Inc. and Lorillard Inc. ) - have an average dividend yield of 5.6 per cent. Over the past five years, to the end of May, the index has returned 65.2 per cent after factoring in dividends, miles ahead of the 1.6 per cent return for the S&P 500.