Tobacco Stocks Fall on Lawsuit Concerns

Shares of Philip Morris Cos. and R.J. Reynolds Tobacco Holdings Inc. plunged anew Monday, after the tobacco industry’s latest legal defeat increased speculation that cigarette makers’ litigation costs will rise.

U.S. District Judge John Lungstrum on Friday ordered Reynolds to pay $15 million to a Kansas smoker, saying the company “concealed the addictive nature of tobacco.” Lungstrum’s punitive-damage award was 76 times greater than the $196,416 of damages levied by the jury in the case.

The award is the first involving punitive damages against a tobacco company in more than a decade by a federal court, where standards of establishing proof are higher than on the state level. That typically has favored the tobacco companies.

The decision also was the first courtroom victory for an individual smoker in the Midwest against the industry, which recently has lost cases in Oregon, California and Florida.

“Most people had felt the litigation picture overall was going to be improving,” said Arthur Cecil, an analyst at money management firm T. Rowe Price Associates, which owns Reynolds and Philip Morris shares.

Reynolds stock (ticker symbol: RJR) dived $5.85, or 9.5%, to $55.70 on the New York Stock Exchange. Philip Morris (MO) sank $3.85, or 7.3%, to $48.80, also on the NYSE.

Also sliding Monday were British American Tobacco (BTI), down $1 to $21.97 on the American Stock Exchange; and Imperial Tobacco Group (ITY), down $2.03 to $30.97 on the NYSE.

Both Reynolds and Philip Morris shares had been among the better-performing blue-chip issues this year, until recent sessions. That may have contributed to investors’ rush to sell and lock in profits, analysts said.

But the underlying fear is that the industry will face a new wave of damage awards.

“While we haven’t seen a dramatic pickup in individual trial cases [against cigarette makers], it could happen,” said analyst Matt Spitznagle at Northern Trust Corp.

Tobacco companies have lost five verdicts in a row on the West Coast, with awards ranging from $21.7 million to $100 million. All of the decisions are being appealed by the companies.

Also, the industry last week was told by a Miami jury to pay $5.5 million to a flight attendant who claims second-hand smoke on airlines caused her breathing problems.

In the 3 1/2 years since cigarette manufacturers reached the $206-billion settlement of health-care claims with U.S. states, the majority of individual suits had been decided in the companies’ favor. In the settlement with the states, the companies agreed to limit advertising and pay for a foundation to reduce teen smoking if the states didn’t sue over the industry’s past behavior.

For investors willing to take the risk, the tobacco stocks’ dividend yields--annual cash dividend divided by the stock price--are surging as the shares fall. RJR’s yield is 6.8%. Philip Morris’ yield is 4.8%.

Those yields are far above the 1.59% average dividend yield of stocks in the blue-chip Standard & Poor’s 500 index, and higher than what shorter-term Treasury securities pay. The yield on two-year U.S. Treasury notes, for example, is 2.9%.