Smoking is a bad habit and one that certainly will not be endorsed here, but tobacco stocks can be healthy for portfolios. In fact, tobacco stocks have been key contributors to the upside delivered by consumer staples exchange traded funds this year.
The Consumer Staples Select SPDR (NYSEArca: XLP) is one of this year’s best-performing traditional market-cap weighted staples ETFs while the equal-weight Guggenheim S&P Equal Weight Consumer Staples ETF (NYSEArca: RHS) has recently been making new highs. Much of that bullishness is attributed to investors’ desire for defensive, lower beta assets, but tobacco stocks are chipping in as well.
“The list of tobacco titans include Altria (MO), Vector Group and Philip Morris International. Altria has seen recent highs not seen since before the financial crisis, and the company offers about a 4 percent dividend yield,” according to CNBC.
Related: 13 Tasty Consumer Staples ETFs to Feast On
XLP, the largest consumer staples ETF by assets, allocates 16.5% of its weight to tobacco stocks, making that the ETF’s fourth-largest industry weight. Philip Morris and Altria are XLP’s third- and fourth-largest holdings, respectively.
The equal-weight RHS has an 8% weight to tobacco names making the group that ETF’s fifth-largest industry allocation.
Reports CNBC: “Adam Fleck, an equity analyst for Morningstar, agrees that the yield in tobacco names that would attract investors “in a low-yield environment.” Fleck, who recently gave Altria a hold rating, believes the stock is overvalued and said he sees its worth at about $59 per share — but that “their pricing value is still fantastic.”
Predictably, one of the criticism of the staples sector is that the group looks pricey.
“By many valuation metrics, however, consumer staples are quite overvalued. As of May 23, 2016, the Consumer Staples Select Sector ETF had a trailing price-to-earnings (P/E) ratio of 21 compared to 18 for the S&P 500. Its P/E-to-growth (PEG) ratio of 2.5 tops the S&P 500’s 1.8,” reports Investopedia.
Related: Sticking With Staples ETFs: Is it a Good Idea?
Defensive sectors often trade at premium valuations relative to the broader market and that is certainly the case at the moment with the consumer staples and utilities groups.
However, that does not mean investors should flee richly valued groups such as consumer staples and utilities. In fact, the case for these higher-yielding sectors could be getting a boost as bond markets are pricing in diminishing chances of the Federal Reserve boosting interest rates later this year.
For more information on the consumer sector, visit our consumer staples category.
Consumer Staples Select Sector SPDR
