Although investors should consider litigation and regulation risks, one analyst thinks tobacco stocks are secure, generate free cash flow and could boost your portfolio.
During the past year, Altria Group, Philip Morris International, and Lorillard have all outperformed the S&P 500 index .
Bonnie Herzog, a Wells Fargo tobacco analyst, said her top pick is Philip Morris, which hit a fresh all-time high on Monday.
“We think profits for PM in Indonesia can quadruple by the year 2020, so to us, this stock has a lot more room on the upside in the next three to five years,” she said. “It should be a core holding in your portfolio.”
Rising international smoking rates should benefit the company due to its vast infrastructure and diversification. It is also the only tobacco company with a partnership in China, she said.
Last week, Herzog upgraded Philip Morris’s competitor Altria to an “outperform” rating, with a $33 price target. She said the company has begun to grow its Marlboro brand profitably.
While global regulation and advertising restrictions will continue to impact tobacco stocks, these shares still dole out some of the market’s biggest dividends.
“Dividend payout for these guys is about 80 percent,” she said. “They do grow in line typically with earnings, so I think that’s something you can count on.”
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Bonnie Herzog does not own shares of Altria, Lorillard, or Philip Morris. Wells Fargo does have an investment banking conflict with the companies mentioned in this segment.
Follow Katie Little on Twitter @katie_little.