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Dividends and Big Tobacco

The industry is facing some disruption, but core cigarette businesses continue to perform.

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Philip Gorham: Love them or hate them, tobacco companies pay big dividends, but it's been a rough ride this year, with the stocks more volatile than they have been in the past. And with the industry facing some disruption, now's perhaps a good time to review the sustainability of those dividends. 

Disruption is coming from the emergence of new products, particularly vaping devices. In the U.S., the FDA is clamping down on the marketing of vaping products. And if the vaping category is impaired as a result of that, we would generally see that as a positive for most of the tobacco industry. It may be attracting a new consumer, but vaping is highly competitive, economic moats are almost nonexistent, and margins are much lower than those of cigarettes as a result.

Philip Gorham does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.