Tobacco is hazardous to your health, and the cost of cigarettes can put a dent in your wallet. But if we're talking about tobacco stock, that's not quite so unhealthy. In fact, tobacco companies have seen a surge in their bottom lines lately. Is it a good idea to pump your hard-earned money into this industry?
Companies such as Philip Morris International
The global tobacco industry sells more than 6 trillion cigarettes in a year. That's a heck of a lot of butts, and the Middle Kingdom dominates the market. The Chinese alone consume around 2.2 trillion cigarettes annually -- approximately 41% of total global consumption.
State-owned China National Tobacco (CNTC) holds a monopolistic 99% interest in the domestic market. Although partnerships with Western companies do exist, CNTC's strong presence has been a major obstacle for international tobacco companies looking to get a foothold in this lucrative market. But there are still huge opportunities elsewhere.
Looking beyond the stagnating markets in the West, the tobacco giants are targeting other emerging markets in an attempt to diversify. For example, Altria's
As they always have, tobacco companies face serious public-health concerns, ongoing legal and regulatory battles, and the threat of higher punitive taxes. These factors all put a dent in profitability, but only marginally. In fact, numerous studies have shown that smokers are surprisingly willing to stick with their favorite brands in spite of new warnings, intimidating packaging notices, and significant price bumps.
A pack of smokes in New York City, for example, now costs $12 to $15 and has been rising for years, well ahead of inflation. Yet estimates suggest that nearly 1 million of the city's 8 million people smoke. Talk about price-resistant customers.
Innovation at home
In addition to milking their domestic customers with plenty of price increases, tobacco companies are focusing on another core tenet of their strategy to combat declining consumption: innovation.
British American Tobacco has started up a company named Nicoventures, which plans to come up with "innovative and regulatory-approved" tobacco products that will serve as a safer alternative to cigarettes. Growing health concerns and greater regulation alike will push up the demand for these products.
Financials don’t affect your lungs
This industry has incredibly deep pockets. Altria has a war chest of about $3.4 billion, followed by Reynolds American with $3.0 billion, Lorillard with $2.1 billion, and Philip Morris with $1.3 billion. These numbers keep the companies' short-term liquidity at extremely impressive levels.
Moreover, the industry is able to generate regular income for its investors. The dividend payout for Altria and Reynolds American stands at 5.8%, Lorillard at 5.2%, and Philip Morris at 3.9%.
Consumption of cigarettes is rising steadily across the globe. Not so much in the West, but as tobacco companies resort to various new growth strategies, there's still some room to grow at home. Regions such as Eastern Europe, India, and South America can quickly become big markets, too. Having the right mix of different products and new markets will enable global cigarette companies to drive their profits north.