At the end of the first quarter of each fiscal year, large tobacco companies typically report a decline in sales for cigarettes and cigars.
This was the case for the first quarter of 2017, in which Altria Group Inc. (MO, Financial), Reynolds American Inc. (RAI, Financial) and Philip Morris International Inc. (PM, Financial), three of the largest tobacco producers in terms of market capitalization, reported their sales declining between 2.6% and 11.5% compared to the same period a year ago.
Altria closed the first quarter with a decline of 2.6% in the number of cigarettes and cigars shipped. During the quarter, Altria shipped approximately 29.09 billion cigarettes and cigars versus a volume of approximately 29.87 billion units in the comparable quarter of 2016.
Reynolds American’s sales volumes dropped 5% in the first quarter of 2017 compared to the corresponding period of 2016, from 18.8 billion units to 17.9 billion units.
Philip Morris International Inc. reported an 11.5% decrease in the number of cigarettes shipped; 173.6 billion in first-quarter 2017 versus 196.2 billion in first-quarter 2016.
These results lead many people to believe the tobacco industry is declining. The declines in cigarette sales at this time of the year, however, are regular occurrences due to seasonality. D. Momperousse, C. D. Delnevo and M. J. Lewis attribute this trend to “tax increases, weather conditions and timing of quitting efforts (e.g., New Year's resolutions)” in their article, "Exploring the seasonality of cigarette-smoking behavior."
Although the conclusions the authors reach apply to the consumption of tobacco in the state of New Jersey, they can also be extended to other states and Western countries since they are consistent with prior research that suggests “cigarette-smoking has a seasonality component.”
The authors concluded that excise tax rates for cigarettes are the strongest predictor of cigarettes sales. The increase in these rates, which usually occurs at the beginning of each fiscal year, causes a higher volume of cigarettes to be shipped by tobacco companies during the first six months of the year compared to the second half of the year as wholesale distributors try to anticipate higher pricing, which usually occurs in July when tax increases begin to take effect.
The positive effect the increased excise taxes have on the volume of cigarettes shipped are offset, however, by the negative influence on sales volumes in February, which - being one of the coldest months of the year - leads to a drastic reduction in outdoor smoking.
The authors also attribute New Year's resolutions to the decline in sales volumes.
Tobacco companies have taken steps to diversify their portfolios in order to protect themselves from a possible dip in cigarette sales. Since the industry continues to steaily grow- albeit slower than a few years ago - it is wise for income investors to remain invested in tobacco stocks.
Altria is currently trading at $72.25 and pays an annual dividend of $2.44, which leads to a dividend yield of 3.44%.
Philip Morris is currently trading at $117.10 and distributes an annual dividend of $4.16 per share, for a dividend yield of 3.63%.
Reynolds American is currently trading at $66.35 and pays an annual dividend of $2.04 per share, for a dividend yield of 3.07%.
British American is currently trading at $70.91 and distributes a dividend of $2.15 per share, for a dividend yield of 3.03%.
Disclosure: I have no positions in any stock mentioned in this article.
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