Tobacco stocks are smoking hot right now with investors, thanks to the safe dividends and strong cash flow, Wells Fargo analyst Bonnie Herzog told CNBC Wednesday.
“What we’re seeing in the U.S. is that although the volume continues to decline in terms of cigarette consumption, the industry’s been able to offset those declines with pricing power,” said Herzog.
Her top pick is Philip Morris International, on which she has an outperform rating. She cited its growth potential, specifically in Asia "where the company is able to generate positive volume."
Herzog also has an outperform rating on Reynolds American.
In the U.S., tobocco stocks are offering a 6 percent dividend yield, she added, calling it “a good place to be for investors.”
But just as smoking has its risks, so do tobacco stocks. Herzog has market perform ratings on Altria and Lorillard. Both are currently awaiting a decision from the Food and Drug Administration on a panel recommendation that their menthol cigarettes be banned .
“That’s been a bit of an overhang. So I do think there’s a negative risk/reward ratio in terms of owning that stock,” she said. “That’s something we’re more cautious on, heading into that decision. Other than that, the [companies’] fundamentals appear quite strong.”
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Neither Bonnie Hertzog or her company own shares of the tobacco companies mentioned.