Cramer's Fave Tobacco Stock
Every portfolio must include a dividend-paying stock, Cramer said Monday. The "Mad Money" host warned that not all high-yielding stocks are created equal, though.
"Sometimes a company will pay a giant dividend even though it’s future is suspect," Cramer explained. "As sexy as that yield might seem, you might very well be sitting on a detonating asset that will eventually implode, wrecking your portfolio."
To illustrate his point, Cramer looked at tobacco names, which tend to pay healthy dividends. Altria, Philip Morris International, Reynolds American and Lorillard all have strong track records of not only paying, but growing a dividend. Yet Cramer is concerned that the domestic tobacco industry may be in long-term secular decline. After all, Americans aren't smoking like they used to. Year after year, fewer Americans are lighting up. While just 21 percent of adults smoke in the U.S., 35 percent of men smoke in developed countries around the world. Thirty-five percent of men in developed countries are smokers and 50 percent smoke in developing countires.
With that in mind, Cramer said he only likes one tobacco name right now — Philip Morris International . The New York City-based company may only pay a 3.9 dividend yield — tiny compared to the aforementioned tobacco names — but Cramer thinks it will be able to increase its dividend as the international tobacco business is still growing. After all, Philip Morris has zero exposure to the U.S., which has become a "hostile place" for big tobacco. It has the highest long-term growth rate in the industry because the growth in cigarette consumption is happening outside of the U.S. PMI does business in 180 countries with a leading market share in most of them, so it's not held hostage to any one country's laws or regulations.
When it comes to the rest of the tobacco companies, Cramer isn't interested.
Altria may be a well-run company that pays a 5.6 percent divident, but Cramer thinks it's dangerous. With headquarters in Richmond, Va., Altria is the largest cigarette company in the U.S. It has a 49.8 percent share of the market, which is concerning to Cramer because the U.S. cigarette market is shrinking. He's worried about Altria's margins.
Altria has recognized that cigarettes are in decline, which is why it bought UST in 2009. UST is the leading maker of smokeless tobbaco products, a market that Cramer thinks still has room to grow. MO still isn't a buy, though. Cramer doesn't want to recommend a company that has great exposure to a market in long-term decline and has lots of litagation risks, too.
Reynolds American is the second-largest tobacco name in the U.S. Like Altria, it is 100 percent domestic. It also has a smokeless tobacco business, but it only makes up 8 percent of the business. Cramer thinks it has the right strategy, but worries it won't work fast enough to offset the long-term decline of smoking in the USA.
Lorillard boasts a 4.7 percent dividend yield, but like Altria and Reynolds American, it has 100 percent exposure to the U.S. Unlike the other two names, Lorillard is 100 percent tobacco, too. It is the least diversified tobacco name and stuck in a market of long-term decline, Cramer said. For that reason, he thinks it will be hard for the company to raise its dividend.
Vector Group is also 100 percent U.S.-based. The stock pays a 8.8 percent dividend yield. Cramer is worried about its prospects, though, because it is a small player with $1.36 bilion market cap. It has had heavy litagation expenses over the years and could find difficulty remaining competitive in the long run, Cramer said.
Bottom line: When it comes to tobacco stocks, Cramer is sticking with Philip Morris International. It may have the smallest dividend yield, but he thinks it has the most growth potential.
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