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E-Cigarettes Are the Main Source of Growth for Global Tobacco Players

Because of the health issues caused by traditional cigarettes, many consumers have turned to e-cigarettes as an alternative way to smoke. Indeed, as there aren't many regulations on e-cigarettes at the moment and they are considered to be cheaper and healthier than traditional cigarettes, the e-cigarette market has been growing quite rapidly. Bonnie Herzog, a Wells Fargo analyst, estimated that the global e-cigarette market could increase to around $2 billion this year, and by 2017 the total market might reach as much as $10 billion. To take advantage of this, many tobacco players, including Philip Morris International (NYSE: PM  ) , Altria (NYSE: MO  ) , and Lorillard (NYSE: LO.DL  ) , have tapped into this market.

Philip Morris considers the commercialization of reduced-risk products, including e-cigarettes, the single greatest growth opportunity for the company. The company has laid out three main strategic objectives regarding this product category. First is to maintain similar taste, sensory experience, and other ritual characteristics shared by traditional cigarettes. Second is to minimize health risk for smokers. Third is to increase awareness and commercialize these products successfully. Philip Morris estimates that it will increase its investment in the reduced-risk product category by more than $100 million, and make a EUR 600 million investment to build a 30-billion-unit manufacturing operation in the next three years. 

Altria, the ex-parent of Philip Morris International, has struggled with strict regulations in the U.S. market. Thus, in order to drive growth, the company has gradually shifted its focus to other innovative smoking products that include e-cigarettes. Several months ago Altria's subsidiary Nu Mark introduced its new MarkTen e-cigarettes in more than 3,000 stores in Indiana. MarkTen is also expected to be available in 2,000 additional stores in Arizona soon. Recently, Altria and Philip Morris have recently entered into a strategic agreement to grow the e-cigarette category. Philip Morris will have the exclusive rights to distribute Altria's e-cigarettes outside the U.S., while Altria will develop the U.S. market for Philip Morris' e-cigarettes. 

Lorillard is also one of the pioneers in the e-cigarette market. In order to differentiate itself from other players, Lorillard made its e-cigarettes look quite different from traditional cigarettes. With a black tube and blue light on, one of them can be used in an area that has smoking restrictions. With its blu eCigs brand, Lorillard has a 49% market share of the U.S. e-cigarette market.  The company has also continued to expand its e-cigarette business by acquiring SKYCIG, the U.K. e-cigarette brand, for $49 million. In the next three years, if SKYCIG meets certain financial targets, another $49 million will be distributed to SKYCIG shareholders. The acquisition will provide Lorillard with a good foundation to fuel its e-cigarette segment.

My Foolish take
With the declining performance of the traditional cigarette business, driven by stricter regulations and higher excise taxes, most of the global tobacco giants have eyed the e-cigarette market as their main source of future growth. As Philip Morris and Altria are the two biggest tobacco players in the international markets and the U.S. market, respectively, their recent partnership agreement could substantially drive their growth in the e-cigarette market. 

At their current trading prices, all three tobacco giants could fit well into investors' income portfolios. Altria offers the juiciest dividend yield at 5%, while Philip Morris and Lorillard give their shareholders similar dividend yields at 4.40%. 

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6/12/2015 4:05 PM
LO.DL $0.00 Down +0.00 +0.00%
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PM $99.18 Up +0.17 +0.17%
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