“The combination of Altria and UST creates the premier tobacco company in the United States with leading brands in cigarettes, smokeless tobacco and machine-made large cigars,” Michael E. Szymanczyk, Altria’s chairman and chief executive, said yesterday (Monday) in a statement.

It’s a smart move for Altria, which has had little success with its own Marlboro-branded smokeless tobacco products. Smokeless tobacco accounts for $3.7 billion in sales annually. It is the fastest growing segment of the tobacco industry.

UST manufactures the two most popular brands of smokeless tobacco for adult users. According to data from the U.S. Center for Disease Control, Skoal has a 28% market share and Copenhagen has a 22% share. Together, they make up half of the U.S. market.

Meanwhile, demand for cigarettes has been on the decline in the United States, dropping 3.5% this year. Higher state taxes have boosted the price of cigarettes and are taking a toll on demand.

“Altria is buying two tremendous brands in Skoal and Copenhagen, which it can drop quite profitably into its own distribution network,” Thomas Russo, who manages more than $3 billion at Gardner Russo & Gardner, told Bloomberg News.

Altria predicts the consolidation will generate an estimated $250 million in annual savings by 2011.

This deal mirrors a similar purchase by Altria’s chief rival, Reynolds American Inc. (RAI), which purchased the second-largest maker of smokeless tobacco, Conwood Sales Co. LLC for $3.5 billion in 2006.

Altria’s purchase of UST could put pressure on Reynolds to make a bid for Lorillard Inc. (LO), another major American tobacco company, The New York Times reported.

Investors “are sniffing out the next deal in tobacco,” Matthew Kaufler of Clover Capital Management in Rochester, New York told Bloomberg after rumors of Altria’s interest in UST were reported late last week. “I would expect Lorillard to be next.”

Source: Altria Group’s $11.4 Billion Purchase of UST Could Spark More Tobacco Takeovers

Then I noticed a sign in the window. “Branch hours are extended today to accommodate all the customers wishing to open a High Yield 4% Certificate of Deposit.”

These customers weren’t demanding to withdraw their money; instead, they were rushing to make deposits. Bank of America (NYSE:BAC) was experiencing a reverse run as investors hurried to start investing in CDs guaranteed by good ol’ Uncle Sam at the biggest bank in America.

Fleeing other investments and the ravages of a bear market, they were trying to protect their money in FDIC insured savings products. Many of these investors may wind up worse off than when they started. “Safer” investments fail to keep up with rising inflation. But there are ways to protect your returns and limit your interest rate risk if you are investing in ultra-safe CDs.

A Glorious Bull Market Goes Bearish

From the early 1980s until 2000, America’s stock market experienced a glorious bull market. The S&P 500 climbed a steep mountainside from 100 to 1,500 points. The average investor in this market became a genius. Every broker was a maestro.

But bulls don’t last forever, and the bears finally showed up. Since 2000, returns have been negative, or flat at best, in the S&P 500, which tracks the performance of America’s 500 largest public firms. Many undisciplined investors have fared far worse. Now that same broker is transformed from a maestro to a goat.

The generation most invested in this market of the last 10 years is my own – the baby boomers. This generation, which gave America free love, Woodstock and the Internet, are scared. As a group, we haven’t saved much for retirement anyway.

Now we find ourselves preparing for retirement with a foreclosure notice in one hand and a bank CD that won’t match inflation in the other.

The Mirage of 4% CD Rates

The safety of a 4% CD is a mirage in the desert of high inflation. Consumer prices rose at an annualized rate of 7.9% in the second quarter. They had already increased at 3.1% in the first quarter of 2008. In 2007, inflation rose by 4.1%, whereas year-to-date we’re already up 5.5%.

Our parents suffered a similar fate while we were partying our way through the 1970s.Their experience tells us that instead of a CD yielding 4%, a better alternative would be stocks in sectors that can hold up in inflationary times – stocks with rich dividends.

Assets such as stocks will do a better job of holding value during high inflation. Why buy a CD at 4% when stock in companies such as:

• General Electric (NYSE: GE) yields 4.3%.
• US Tobacco (NYSE: UST) yields 5%.
• Pfizer (NYSE: PFE) yields 6.8%.
• Dow Chemical (NYSE: DOW) yields 5.1%.

These yields are eye-popping by most historic measures. You can pocket these and other dividend payments until the market rebounds. These companies will pay you to hold their stock.

Investing in CDs – Consider Laddering Your CD Portfolio

If you feel compelled to flee for the safety of CDs, or if you need to hold a large portion of your portfolio in these obligations, then at least consider “laddering” your CD portfolio.

Laddering is a lot like dollar-cost averaging when you buy stocks. With laddering, you stagger the maturity dates to take advantage of rising rates.

It works like this…

• You don’t invest all your CD money in a single maturity date.
• Instead of putting all your money in one product, you buy several.
• If you had $50,000 to invest, you would acquire a $10,000 one-year CD, a $10,000 two-year CD and so on until your last $10,000 buys you a five-year CD.

Each CD is like a rung on a ladder. When the one-year CD matures, you reinvest that money in a five-year CD. The cycle repeats, and gives you the ability to reinvest at better rates. Some of your money will always be less than 360 days from maturity.

Interest rates often climb in periods of inflation. Each year you will have an opportunity to grab the higher rates if they appear.

However, if you can sleep at night and still own stocks, then holding on is my recommendation. In the end, most bank CDs will leave you worse off after price inflation. Besides, I hate waiting in lines.

There are no guarantees, but history has shown that individuals brave enough to buy stocks in bear markets are better off in the long run.

Good investing,

Floyd

Source: Two ‘Safe Harbor’ Plays Right Now

It’s a blue-chip company. But it’s not a bank. Or a car manufacturer. Or Mircorsoft. Or Google.

It’s cigarette company Philip Morris.

Despite litigation and all the negative publicity, Ian Davis in the Growth Stock Wire thinks an investment in cigarettes is an excellent recession play – they do have a 15% annualized growth rate after all…

 Back in the day, cigarette smoking was a respectable business.

In the 19th century, Philip Morris (PM) was a luxury cigarette company and had one tiny, boutique shop on London’s Bond Street.

In 1901, by royal warrant, Philip Morris & Co. became the royal tobacconist to King Edward VII… and with success came growth. Just one year later, the company expanded its business to the United States.

In 1938, the company went public… and investors have been reaping the rewards ever since.

Between 1957 and 2007, Philip Morris was the single highest-returning stock in the United States. A $1,000 investment in Philip Morris in 1957 would be worth about $5.8 million today.

Although Altria’s (MO) returns are the best in the business, other tobacco companies have performed almost as well. Even today, amid declining smoking rates in the U.S., tobacco companies continue to outperform other equities.

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Take a look at the performance of the Datastream Tobacco index since 1973. As you can see, the index has maintained an amazingly consistent 15% annualized growth rate for most of its history.

And more importantly right now, downturns in the tobacco sector do not seem to correspond with market downturns.

Tobacco Is Alive and Well in the U.S.

I’m not saying tobacco companies can’t correct… In 1999, the tobacco index fell by a precipitous 60%. But the stocks were back at new highs a year later…

The fall came after the index was selling for a relatively high 23 times earnings. The companies had settled a number of lawsuits in 1998, and investors were optimistic. After an adverse court ruling in Florida, the index fell down to a P/E of 6.1.

The constant risk of litigation is why this sector is usually so cheap, with a median P/E of 13. But right now, it’s relatively pricey…Although well below all-time highs, the tobacco index is selling for 15 times earnings (18% above its median). Investors are probably bidding these stocks up, cashing in on their reputation for being a safe haven in a tough market.

With these valuations, I wouldn’t hop on tobacco right now for a short-term trade. But as you can see, the sector has always been a good long-term hold.

Good investing,

Ian Davis

P.S. In 1985, Philip Morris changed its name to Altria Group. Then earlier this year, Altria spun off Phillip Morris International to focus on the U.S. market.

Right now, Altria is the most expensive cigarette by price to earnings. Historically, Reynolds American (RAI) and UST have held this honor. Apparently, investors liked the spinoff and have bid up Altria’s stock price accordingly.

Reynolds American is currently the cheapest tobacco company in the Datastream index. It is trading at a P/E of 10.2, about 29% below its median.