Analysts Stay Neutral on Tobacco Stocks

While there were 3 million less smokers last year than in 2009, according to surveys conducted by the Centers for Disease Control and Prevention, Altria (NYSE:MO), the parent company of cigarette manufacturer Philip Morris (NYSE:PM), has managed to continue its annual dividend increase.

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Statistics indicate that the tobacco tax bill, signed into law by President Obama, has helped lower smoking rates, but nevertheless, tobacco stocks have continued to be among the most popular dividend stocks.

In a note to clients, Zacks analysts reaffirmed the stock’s “neutral” rating, writing that Altria’s second-quarter earnings of $0.59 per share exceeded the firm’s expectations by 3.4 percent. Zacks cited the company’s efforts to popularize non-combustible-nicotine-containing products, or electronic cigarettes, as the source of the gains. However, the note revealed concerns over the “unfavorable excise tax environment,” which has caused Altria’s premium brands to increase in price. Coupled with the FDA’s anti-smoking campaigns, the new tax poses significant overhangs for the company.

Overall, analysts have mixed opinions on Altria. Analysts at Jefferies Group gave the company’s shares a “hold” rating in a research note sent to investors on September 6th.  The stock was upgraded to a “buy” rating by Dahlman Rose, while analysts at UBS AG downgraded the stock from a “buy” rating to a “neutral” rating in a research note dated July 26.

Reynolds American (NYSE:RAI), Altria’s largest competitor, received a neutral recommendation from Zacks as well. Reynolds, like Altria, suffered from the new tobacco tax. Second-quarter sales declined 4 percent year-over-year and net sales missed the firm’s estimate of $2.3 billion. According to analysts, Altria’s innovative product launches, namely the electronic cigarette, have also contributed to Reynolds’ lower-than-expected sales and the decreasing market share of its Pall Mall and Camel brands.

But Altria, which has nearly 42 percent of the cigarette market, has not been the best performing tobacco stock in the last year. That designation belongs to the United States’ smallest publicly traded tobacco company, Lorillard (NYSE:LO). The company’s stock closed at $120.85 on Thursday, far above Altria’s closing price of $33.61 per share.

While analysts remain neutral on both big tobacco companies, Altria and Reynolds have given shareholders increased dividends in recent months. On August 24th, Altria increased its adjusted annual per share dividend by $0.03, the company’s 46th increase in 44 years.

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