Miton's Ford: A lot of puff around tobacco stocks

The recent £23bn fine for Reynolds American could be a sign that tobacco sector is due to face another era of battling lawsuits. But if CEOs keep their houses in order, investors will stay hooked on tobacco stocks argues Miton's US manager Nick Ford.

It has been a good year so far for investors in tobacco companies, with US stocks ahead of the S&P 500 index since the end of December. Can the run continue? Tobacco stocks look attractively valued relative to bonds. Altria and Reynolds American have dividend yields of 4.6% and 4.7% respectively, compared to only 2.5% for 10-year treasury bonds. This spread is well above average, as historically the stocks have yielded 100bps less than 10-year treasuries, which is great news for equity income investors. Deflation protection US tobacco stocks also have high pricing power, which...