Philip Morris International Inc. (PM), Altria Group Inc (MO), Lorillard Inc. (LO) – Sky-High Dividends for a Faltering Industry: Does Tobacco Still Have Potential?

Cigarettes are addictive by nature and are the leading cause of preventable illness and death in the USA. If an investor’s perspective is not clouded by the moral stigma attached with smoking, he now faces a more pertinent question – with smoking rates declining in the USA, is it risky to bet on cigarette stocks? Tax increases, smoking bans and health concerns have made the cigarette business tougher. At the same time, however, the tobacco industry does offer very attractive dividends.

Philip Morris International Inc. (NYSE:PM) has been in news for the wrong reasons recently. Leaked documents showed elaborate details about the targeting of key politicians in the company’s bid to quash plans to introduce standard packing in the UK. Philip Morris International Inc. (NYSE:PM) sells cigarettes outside of the U.S; in the second quarter of 2013, its cigarette shipments declined by 3.9%.

The company reported an increase in the operating profit by 2.6% in Eastern Europe, the Middle East and Africa, and a 5.6% jump in business in Latin America and Canada. The European Union and Asia saw declines of 2.6% and 5.6%, respectively. Unlike its American counterpart and peers, Philip Morris International Inc. (NYSE:PM) has not traveled down the e-cigarette route and only expects to launch the first of its next-generation e-cigarette products between 2016 and 2017.

While demand for cigarettes dwindles in the U.S. and Europe, Philip Morris International Inc. (NYSE:PM) is targeting developing countries to sustain its sales as the awareness level for consumers there is comparatively low.

Altria Group Inc (NYSE:MO) is the seller of Marlboro and the rest of Philip Morris International Inc. (NYSE:PM)’ cigarette line in the United States. The company’s profits were up 3% in its latest quarterly report, on the back of higher prices and lower costs.

In the quarter, the company saw volumes decline by 7% year-over-year with the sharpest decline being felt in the premium brands such as Marlboro.

Altria Group Inc (NYSE:MO) is the last of big American tobacco companies to come out with a product for the swiftly growing market e-cigarette market. MarkTen, the company’s new e-cigarette brand, has tremendous potential as there are more than 45 million Americans who smoke cigarettes; half of them try to quit every year.

Lorillard Inc. (NYSE:LO) only sells cigarettes in the U.S. and reported an increase of 10% in its profit in its second quarter earnings report. The company cited higher prices, sales of its electronic cigarette and lower legal expenses to offset the industry standard decline in traditional cigarette sales.

The company’s traditional cigarette shipments fell 2%. Its e-cigarette goes by the name of Blu and the company estimates its share of the U.S. retail market to be more than 40%. Blu is now available in approximately 110,000 stores in the U.S. and the company plans to expand into Canada during the second quarter of 2013. The company estimated that total retail e-cigarette category sold the equivalent of 35 million packs of traditional cigarettes during the quarter.