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Obama To Regulate E-Cigarettes In 2014: How Will Tobacco Stocks Respond?

James Dennin, Kapitall: Obama is making regulation of e-cigarettes a focus for next year. How will this affect tobacco stocks?

President Obama proposed the two major arenas his administration will focus on for new regulations during his second term. And while the first and major one is no surprise – fracking, a ferociously controversial subject – spending your final years in office regulating e-cigarettes seems like a more unexpected choice. 

Presidents usually wait until the end of their terms before introducing a lot of new regulations. That's typically because "economically significant" rules can have costs that exceed $100 million – which means that there are 100 million reasons for various interests to oppose them.

Cigarettes, while certainly laden with some ethical issues, are notoriously reliable investments. As Warren Buffet famously put it, they cost a cent to make, you can sell them for a dollar, and they're addictive. E-cigarettes may cost more to make, but they certainly fulfill that final condition – and they are also far less regulated. 

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American tobacco stocks have performed very well this year – especially ones with exposure to the nascent e-cigarette industry. The big three – Lorillard (LO), Altria (MO), and Reynolds (RAI) – have all yielded moderate to strong returns in the last year. Lorillard, which has been the most aggressive in pursuing e-cigarettes, is up over 30% for the year. 

As a result these companies pay some of the biggest dividends out there – and last week Lorillard increased theirs again up to $0.55 per share, or 4.19% at the current stock price. 

Read more on e-cigarettes from Kapitall: E-Cigarettes Avoid EU Regulation, Anti-Smoking Advocates Left Fuming

So will these tobacco stocks suffer if the government introduces new regulation? For now at least, it looks like they're smoking the competition.