The dividend yield on Reynolds stock is over 15 percent, while that on Morris is about 10 percent. If Philip Morris's very profitable tobacco business somehow vanished overnight, leaving it with only the profits from its other operations, including Miller beer and Kraft foods, the stock would no doubt rally significantly. And yet over on the bond market, a Philip Morris bond that matures in 2027 is trading at a yield of 8.5 percent. That's a couple of percentage points more than the yield on similar Treasury bonds, but it's far below the rate you'd expect if default was deemed likely. That split opinion reflects the differing realities of the cigarette business.
Cash flows remain strong, in part because addicted customers are loyal customers.
But the class-action lawyers are circling, and the stocks keep falling. If you accept that, there is no particular public interest to be served by bankrupting the companies. To the contrary, it is in the interests of the states to keep the companies in business and able to make settlement payments. Those buying tobacco stocks now are placing a reasonable bet that the companies will survive, and that the legal cloud will eventually dissipate. Those buying Philip Morris bonds, on the other hand, are taking virtually the same risk, but with a far smaller reward if they are right.