Tobacco Stocks

Tobacco Stocks: The Moral Dilemma

If you read around some different investing message boards (see the Dividend Growth Forum) you will come across varying opinions on whether investors should be investing in stocks of tobacco companies.  While sometimes these opinions may be based on sound financial analysis (such as a concern decreasing sales for tobacco companies due to decreasing tobacco product consumers), it seems the majority of issue individuals have when considering investing in tobacco companies is the moral dilemma.

Conflict of Investing in Tobacco Companies

The question of investing in tobacco companies tends to be a moral question.  Is it morally right to invest in companies which make a profit off of a product that has been proven to cause very major negative health issues?  According to the CDC (Center for Disease Control and Prevention), the adverse health effects from cigarette smoking account for nearly 440,000 deaths each year in the United States.  Smoking is estimated to increase the risk of coronary heart disease, stroke, lung cancer and chronic obstructive lung diseases (such as chronic bronchitis and emphysema).

Clearly, smoking tobacco products is very bad for your health.  I’m not sure you’d find many people to argue against these facts.  The majority of people should realize the very negative effects caused by using tobacco products.

So since tobacco products are so bad for humans, how can anybody feel it is OK to invest in and make a profit off of such a terrible product?  Do we, as human beings, have a moral obligation to other human beings to not support and not profit off of tobacco?

Many people certainly feel we should not be profiting off of tobacco.  However, there are many people that don’t mind owning stock in tobacco companies despite the negative health effects experienced by tobacco consumers.


Tobacco Equals Big Profits and Consistent Dividends

The truth is, tobacco is great business and some of the largest tobacco companies are also some of the greatest dividend growth stocks.  There are 4 tobacco companies that I personally follow.  Altria Group (MO), Lorillard (LO) and Reynolds American (RAI) are the three largest United States tobacco companies.  They do all of their business solely in the U.S.  Philip Morris International (PM) was spun off from Altria back in 2008 and is an international tobacco company selling products throughout the world outside of the U.S.

These 4 companies have a great history of returning shareholder value by paying out annually increasing dividends as well as executing generous stock share buy back programs.  Each year these companies pay out a higher and higher amount of profits to shareholders.  Each year these companies also purchase and retire shares outstanding so that each share left is now worth a higher percentage of the company and thus its assets and profits.

Altria Group (MO) is the king of tobacco companies with a 45 year history of paying out increasing dividends.  Since spinning off their international unit (Philip Morris), Altria has been able to increase earnings per share at a greater than 7% clip.
Reynolds American (RAI) has the second longest dividend growth streak by paying out annually increasing dividends to shareholders for 9 years.  RAI has been able to achieve greater than 9% EPS growth over the past decade.
Lorillard (LO) has been rewarding shareholders with 6 years of dividend growth.  They have also been able to increase their EPS at a recent clip of above 10% annually.
Philip Morris (PM) has been paying out 6 years of increasing dividends and the international tobacco company has been growing earnings per share since their spinoff from Altria at a greater than 11% rate.

For those investors whom don’t feel it is morally wrong to invest in tobacco companies, these investments have proven to be very profitable.  Despite the declining number of consumers using tobacco products and the declining revenues that can be seen by examining tobacco companies income statements, these companies have managed to grow the most important number of all for investors (earnings per share).  This EPS growth throughout the years has led to some very nice investment gains and dividend income for owners of these companies.

My Feelings

Personally, I’ve gone from one side of the fence to the other when it comes to the argument of should we be investing in tobacco companies.

The truth is, I hate the negative health effects of tobacco products.  I’m not a fan of tobacco products, don’t personally use them and prefer not to be around those who do use them.  I don’t like the idea that those people who do decide to use tobacco products will eventually suffer some major negative and painful health consequences.  I don’t like that their loved ones will suffer because of the choices they have made.  I have had people in my life whom I was very close to pass away from lung cancer due to many years of smoking.  Due to this, I started out completely against owning any stock in any tobacco companies.  I wanted no part of it.

However, it’s very difficult to ignore what wonderful investments these tobacco stocks make.  While researching financials of some of these companies, my opinions on investing in tobacco companies gradually changed.

Eventually I came to see that using tobacco products is a personal choice.  In this age, everyone should be aware of the negative consequences of using tobacco products.  Unfortunately, despite the risks of smoking, many people still decide they want to use these products.  For me, this is a personal choice that they have made.  With all of the knowledge of the risks made widespread, I don’t feel like I should personally feel bad when people choose (despite the risk) to use tobacco products.  That is their choice.  Therefore it has been my choice to go ahead and invest in these companies.

Tobacco companies are money making machines who are very shareholder friendly.  They distribute a large portion of their profits to shareholders in the form of dividends and share buybacks.  Whether we choose to take a moral stand for or against tobacco companies, it really means nothing in the grand scheme of things.  Other investors will continue to invest in their shares, consumers will continue to use their products and tobacco companies will continue to make big profits regardless of my own personal moral decision.

How About You?

So what about you?  Have you decided for moral reasons that you will not own shares in tobacco companies?  Or are you fine with making investments in these companies despite the negative health effects caused by their products?

It’s a moral dilemma and whatever your opinion, you can be guaranteed there are many people choosing the other side.


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