Investing

Should Tobacco Dividends Be Lower Than Telecom Dividends?

The public is more addicted to smartphones now than it is to tobacco. The big tobacco companies are all making moves into e-cigarettes, but the reality is that vaping is still very small for their own businesses, and they allowed many competitors and upstarts to get a leg up here. Now the question will come down to how the Food and Drug Administration will regulate non-tobacco nicotine.

Does telecom have any serious regulation coming down the pipe? Maybe if you consider net neutrality, but Congress and the courts seem not to care too much about the matter. The public outcry for faster movie downloads and higher bandwidth is of course there, but it isn’t exactly the same as the years of lawsuits and protests against big tobacco for lung cancer, throat cancer, emphysema and a host of other diseases that have killed millions.

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When it comes to tobacco, the comparisons from a year ago are uncanny. What we cannot ignore is that all three of the tobacco stocks are trading above the consensus Wall Street analyst price targets. While analysts are often behind the curve, or often fail to participate in rallies, can we say that it is safe to assume the majority of them are just dead wrong? Maybe, but maybe not.

Altria’s yield a year ago was 4.9%, versus just over 4.6% now. Altria shares traded at about $36.15 a year ago, versus $41.40 now. The consensus analyst target is $40.00.

Reynolds American’s dividend yield was 5.2% right around this same time in 2013, versus 4.45% now. Its stock traded around $49.10 a year ago, versus $59.35 now. Analysts have a price target of $54.71.

Lorillard’s dividend was close to 5.0% a year ago, but the merger premium speculation has the dividend down closer to 4% now. Lorillard shares were around $45 a year ago, versus almost $60 now. Lorillard’s consensus analyst price target is also just under $54.75.

Again, tobacco companies face hurdles beyond most businesses. States and cities are only going to keep increasing their taxes. Case volumes of cigarettes are going to remain in decline, which the companies will hope to offset by e-cigarettes. Social pressure remains against tobacco companies and likely always will.

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Most people seem to have unhealthy addictions to their smartphones. How many times have you been run into by someone walking on a street because they were too engaged on their smartphones? How many times have you been almost hit by someone texting in a car or by someone too engaged on their smartphone? Still, no national regulation has come down on smartphone users. Then there is that age-old argument about brain cancer risks, which remains highly debatable.

Investors often pile into telecom dividend stocks and tobacco dividend stocks when they become uncertain about the stock market. They are both defensive and ways to stay in the market without losing your shirt in a stock market correction.

It turns out that for dividend investors, and maybe for the public in general, smartphones may just be the new cigarette.