Photographer: Daniel Acker/Bloomberg

Five Charts That Show the Tobacco-Stock Rally May Be Flaming Out

The long rally in U.S. tobacco-company shares may be about to burn out.

Altria Group Inc. and Reynolds American Inc. have risen more than four times as much as the Standard & Poor’s 500 Index over the last decade. But for investors looking to profit on vice, it might be time to turn elsewhere. 

The tobacco companies’ outperformance has given investors cause to rejoice. However, that long rally has pushed up valuations and shrunk the dividend yields that once made the shares attractive.

Meanwhile, the long-term decline in cigarette sales -- which paused last year as falling gas prices gave consumers more money to spend on smokes -- looks ready to resume. Altria and Reynolds both say they expect volumes to continue falling 3 percent to 5 percent a year, driven by consumers kicking the habit.

Even as fewer people smoke, the tobacco companies are forced to pay billions of dollars in excise taxes each year. Rising taxes also are increasing the price of a pack of cigarettes, hurting smoking rates.

To combat these trends, the companies are looking to new offerings like electronic cigarettes. Winston-Salem, North Carolina-based Reynolds is working on smokeless products with British American Tobacco Plc, which owns 42 percent of the company. Richmond, Virginia-based Altria has a similar partnership with Philip Morris International Inc. 

The problem is that sales of those products, after an initial growth spurt, have leveled off and even begun to fade.

The companies’ estimates for the growth of these products also may prove to be too optimistic if the U.S. Food and Drug Administration imposes the same restrictions on e-cigarettes as it does on traditional smokes. 

“Consumers want this category to be successful, but many products have simply not lived up to expectations,” Debra Ann Crew, president and chief operating officer of R.J. Reynolds Tobacco, said on a conference call.

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