The Stunning Success of Tobacco Investing

The Wall Street Journal has an article today on the amazing profitability of tobacco stocks. This seems to be a fact well-hidden from everyone except us stock-pickers. After all, the tobacco biz goes all the back to the founding of the country.

The WSJ article has several factoids. Here are a few:

“Americans spent more at retail stores on cigarettes in 2016 than they did on soda and beer combined.”

“The number of cigarettes sold in the U.S. fell by 37% from 2001 to 2016.”

“Over the same period, though, companies raised prices, boosting cigarette revenue by 32%, to an estimated $93.4 billion last year.”

“An average pack in the U.S. cost an estimated $6.42 in 2016, up from $3.73 in 2001.”

“The operating profits of U.S. tobacco manufacturers have grown 77% since 2006 to $18.4 billion in 2016.”

“In 2000, U.S. tobacco companies’ price-to-earnings ratios were about a third of their consumer-staples peers’. Today, they’re roughly 10% higher.”

“The S&P 500 Tobacco Index fell 22% between 1998 and 2002. Over the past decade, it’s up 178%, outperforming the broader S&P 500, which climbed 58%.”

“The industry sells 5.5 trillion cigarettes each year to the world’s one billion smokers.” (Can that be right? Wow. That means the average smoker smokes 5,500 cigarettes each year, or about 15 per day.)

“About 42% of the average U.S. pack price is tax.” In Britain, it’s 82%.

“The adult smoking rate in the U.S. fell to 15% in 2015, from 25% in 1995. The rate among high-school students dropped to 11% from 35%.”

I was recently reading the Hendrik Bessembinder paper, “Do Stocks Outperform Treasury Bills?” He ran the numbers of all the stocks listed in the CRSP database. He found that the top-performing stock from July 1926 to December 2015 was Altria. The gain was 2,029,630.4%.

Here’s a look at how tobacco stocks as a whole have performed over the last 17 years.

That’s a 1,300% gain for the sector. Tobacco has done so well that the S&P 500 looks like a flat line in comparison. If anything, that chart understates tobacco’s gain because it doesn’t include dividends.

Posted by on April 24th, 2017 at 12:53 pm


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