Sooner or later, as with any business, a decline in revenue will signal a declining stock. Of course, there will be some tobacco companies that will thrive and continue to grow, although the industry as a whole does appear to be heading down a dull stretch. To conclude, let’s take a look at a few areas that are weighing against each of the noted stocks above.
Altria Group Inc (NYSE:MO) is a holding company with brands that include Philip Morris, which commands 50.3% of the U.S. cigarette market with Marlboro. Despite this share, the company does not have an e-cigarette brand (although it will in the future). The company has zero revenue growth and trades at 16.2 times earnings. While this is only slightly higher than the S&P 500, it is far above the company’s historic ratio at 11.7. With zero growth, I think this premium is too expensive.
Lorillard Inc. (NYSE:LO), and its brand Newport, are less than 10% of the U.S. market. However, with menthol being one of the only bright spots within the industry, Lorillard Inc. (NYSE:LO) is producing modest growth of 4-5%. The problem is that Lorillard controls 40% of e-cig market, and with its larger competitors coming to the market it could lose significant share, thus leading the company to miss expectations.
Reynolds American, Inc. (NYSE:RAI) is the second largest tobacco company, with 27% of the total market. Much like Altria Group Inc (NYSE:MO), the stock’s P/E ratio of 17.7 is far above its historic level (12.11). Moreover, the company has a dividend payout ratio of 89, and since companies can’t successfully manage a ratio above 90, it leaves very little dividend upside due to zero growth.
British American Tobacco PLC (ADR) (NYSEMKT:BTI) is a global company producing every type of tobacco product. The company is known for its cigars, roll-your-own cigarettes, and pipe tobacco, which are all dying forms of tobacco. The company’s revenue has been flat for the last two years and is not expected to grow. Therefore, at 17.5 times earnings, the stock is very expensive, much like all others in the space.
Final Thoughts
There’s no doubt tobacco companies have been great investments for many years, and they continue to pay out great dividends. Therefore, you might want to maintain your holdings. However, we are now seeing an industry shift. We are seeing fewer people smoke and more people switch to e-cigarettes. Much like other multi-year uptrends, all rallies eventually end. The tobacco space has seen a multi-decade rally, and rightfully so, but with a lot of questions surrounding its future it might finally be time to take gains and invest elsewhere.
The article You Might Want to Avoid This “Can’t Miss Industry” originally appeared on Fool.com and is written by Brian Nichols.
Brian Nichols has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Brian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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