Philip Morris Is No Longer the Best International Tobacco Company

Philip Morris has been replaced by smaller peer British American, which is better placed for growth.

Jun 27, 2014 at 8:00AM

In the world of big tobacco two companies virtually control the international market. British American Tobacco (NYSEMKT:BTI) and Philip Morris (NYSE:PM) together control around 45% of the international market, excluding China.

Both companies are great investments, but for US investors at least, Philip Morris tends to be the company of choice. However, British American has many attractive qualities, and the company could be better placed for growth than its larger peer Philip Morris.

Attractive qualities
Philip Morris' most attractive quality is its ownership of the famous Marlboro brand. British American lacks a similar iconic brand.

Nevertheless, the company has many attractive qualities. For example, the company's Global Drive Brands Dunhill, Kent, Pall Mall, and Lucky Strike are well known internationally and have been gaining market share over the past several years .

What's more, like Philip Morris, British American has a wide economic moat and geographical diversification. The company sells 75% of its cigarettes in developing markets. On the other hand, unlike Philip Morris, which for the most part relies on the sales of its high-price, high-margin Marlboro brand, British American's portfolio is roughly evenly divided among premium, mid-price, and low-price brands.

This gives the company a stronger long-term outlook than Philip Morris because as tobacco prices continue to rise, mainly due to higher excise taxes, British American is able to cover all bases.

Still, at present the international cigarette market continues to grow and British American will be able to profit from this.

Growing market
Over the period from 1990 to 2009, the volume of cigarettes consumed around the world increased from around 5,300 billion cigarettes to just under 6,000 billion, an increase of approximately 13% -- with the decline in consumption within developed markets like the US excluded, this figure would have been much higher .

Then there is also the issue of Reynolds American. You see, British American controls around 50% of Reynolds, and this gives the company exposure to the US cigarette market, something Philip Morris does not have.

British American has been forbidden from increasing its stake in Reynolds until this June, but it is possible that the Anglo-American company could swallow Reynolds to boost its margins. Analysts at Citigroup believe that this is a real possibility. Reynolds is a champion of the domestic cigarette market with an attractive electronic-cigarette segment, which would complement British American's existing offering and global presence.

However, Citi believes that a joint venture between Reynolds and British American is more probable than a takeover, as this would allow British American to access Reynolds' e-cig technology without having to jump over regulatory hurdles.

Citi believes that if British American does acquire Reynolds, the Anglo-American company would then make a swoop on Lorillard. Such a move would consolidate its position within the U.S. tobacco market and put it in a great position to take on industry behemoth Altria Group. Click here for "Your One-stop Guide to the Potential Reynolds American-Lorillard Merger".

Of course, if the much-debated deal between Lorillard and Reynolds goes ahead then a different outcome could arise altogether. In this case it is suspected that British American will take the parts of Reynolds that the larger Reynolds-Lorillard combination does not, or cannot, sustain. If you'd like more information on how British American could benefit from the Reynolds deal, I've written a summary which can be found here.

Foolish summary
So all in all, while Philip Morris has been the undisputed champion of the international tobacco market during the past few decades, British American is catching up. British American has a broad selection of tobacco brands and does not rely on one key brand to support sales. What's more, the company has access to the US domestic market unlike Philip Morris.

Nevertheless, like Philip Morris, British American has exposure to Asia, where cigarette sales are still rising. But overall, British American's product portfolio and global presence give the company a winning position in the market. It may be time for Philip Morris to step aside. 

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Rupert Hargreaves owns shares of Altria Group. The Motley Fool owns shares of Citigroup. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers