Pro Analysis

Sell this tobacco stock because rising gas prices will hurt cigarette sales, RBC analyst says

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RBC Capital Markets downgraded Altria to underperform from sector perform, citing the likelihood tobacco sales will suffer from rising gas prices.

Higher interest rates should also reduce the attractiveness of dividend-paying tobacco stocks, the analyst said.

"Gas prices are now trending above the 3-year average—a trend we have not seen sustained since late 2015 ... The increase may feel like a headwind to the consumer on a relative basis, which in turn could translate into less disposable income," analyst Nik Modi said in a note on Thursday.

"When interest rates are sustained at lows, investors typically look to Altria shares for yield, as the stock offers 3.25% at current levels. However, as interest rates rise, we expect tobacco stocks will shift out of favor," he added.

The Federal Reserve hiked rates by 25 basis points at its March meeting.

Shares of the tobacco company dropped almost 1 percent in morning trade on Thursday.

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