What do Blue Devils, Tar Heels, and Big Tobacco have in common? They're fiercely fighting rivals for victory, whether that means winning on the basketball court or the stock market.
It's been called "the best rivalry in college basketball." Tonight, the Duke Blue Devils men's basketball team will travel 10 miles down Tobacco Road to play the UNC Tar Heels. The colleges' home turf of North Carolina stands as the top-producing tobacco state in the country, and while Duke's tobacco warehouses lie dormant, nearby Winston-Salem houses R.J. Reynolds Tobacco (RAI). Meanwhile R.J's Big Tobacco rival, Phillip Morris (PM 1.76%), operates in nearby Virginia.
As Blue Devil and Tar Heel fans alike paint their faces seeking victory in tonight's game, should profit-seeking investors get just as thrilled about these rival tobacco companies?
A moral tipoff: Who really wins when tobacco stocks profit?
Whichever team wins tonight, avid Duke and UNC fans will get over the game's results within a few days--but can tobacco investors sleep so well at night? Sure, R.J. Reynolds and Phillip Morris cough up large annual dividends -- 5.59% and 4.70%, respectively -- but these companies attain profits by selling and marketing cigarettes, which some investors will find morally objectionable.
Investors must pick a moral side when deciding whether or not they will root for tobacco stocks.
Time out: Can Big Tobacco sell cigarettes from the sidelines?
While Duke's Cameron Indoor Stadium has always been famous for its small size, seating fewer than 10,000 rabid fans, R.J. Reynolds and Phillip Morris are forced to play their tobacco game on a still-shrinking court. Decades of lawsuits and government refereeing have been burning the cigarette companies' profit opportunities by limiting their growth.
What started in 1964 with the Surgeon General's warning that cigarettes can cause lung cancer has extended in later decades to cigarette warning labels and advertising limits. Cut off from growing their customer bases, R.J. Reynolds and Phillip Morris have raised prices on current addicts.
Shockingly, the latest game-changer for R.J. Reynolds and Phillip Morris' fortunes was not more top-down legislation, but a market-driven blow to these rivals' scoreboards. CVS Pharmacy announced earlier this month that it will cease selling cigarettes by October.
Buzzer beater: Will e-cigs, emerging market smokers save the game?
Just like Duke and UNC's legendary basketball coaches, Mike Krzyzewski and Roy Williams, no doubt have plays up their sleeves to win tonight's game at the last minute, so too have R.J. Reynolds and Phillip Morris devised strategies to win an ever-tougher match.
Phillip Morris has teamed up with its Big Tobacco league rival Altria (MO 0.16%). These companies are sharing their e-cigarette technology -- e-cigs are smokeless devices that deliver nicotine without the addiction -- in the hopes of a growth-inducing slam dunk. Altria announced in early February that it will acquire e-cigarette seller Green Smoke for $110 million. For Phillip Morris, e-cigarettes may prove a game-changer for revenues: the global market for e-cigarettes has gone from thousands to millions of users since 2006.
R.J. Reynolds also has its own e-cigarette brand: Vuse. Both R.J. Reynolds and Philip Morris are also looking toward emerging markets in Asia and Africa, which still have lax smoking laws and hundreds of millions of smokers, to stay in the growth game. However, China recently banned smoking in public by officials -- so these rivals' overseas potential may be turning to ash.
Foolish bottom line
Centuries into the cigarette game, it's unclear which team (if any) will emerge the winner. Predicting the future successes of R.J. Reynolds, Phillip Morris, and Altria involves higher stakes than those of the UNC-Duke game, though: billions of dollars and lungs depend on the outcome. Investors should consider the complex rules by which tobacco stocks must play before stepping foot onto the court.
