Diversification
Diversification can be key to business. I may have proved that tobacco sales are still resilient across the globe, but it is fairly essential that tobacco companies diversify out of pure tobacco. Diversification is common sense; it limits risks and reliance on one product. In addition, it would be a bad business decision not to diversify into smokeless tobacco right now while the market for smokeless products is growing so rapidly.
| Operating Income Q4 | |||
| $US Million | Tobacco | Other | Total |
| LO | $515 | $7 | $522 |
| MO | $1,745 | $37 | $1,782 |
| PM | $3,295 | – | $3,295 |
Altria is the most diversified of the three companies. Altria has a shareholding in SABMiller, wine estates, and a large smokeless product portfolio – although in the fourth quarter non-tobacco sales only accounted for 2% of total operating income.
Lorillard was late to the diversification party and has only just started (as i have already mentioned). However, the company’s smokeless division is growing rapidly. The smokeless division only accounted for only 1.4% of revenues in the fourth quarter but, this was up from 0% in the third quarter – (a unrealistic rise of 1400%.)
| Operating Income FY 2012 | |||
| $US Million | Tobacco | Other | Total |
| LO | $1,877 | $1 | $1,878 |
| MO | $6,984 | $134 | $7,118 |
| PM | $14,153 | – | $14,153 |
On a full year basis, Lorillard’s smokeless revenue came in at $1 million, which was due to losses associated with rolling out the smokeless products across its network of distributors and marketing costs. Once Lorillard’s smokeless start-up costs have been paid off, the additional revenues should really boost the company’s bottom line.
Philip Morris has no diversification into smokeless products, which could be a hazard for the company in future.
Shares In Issue
All three of these companies has been buying back stock over the past year to boost EPS growth and share prices. Indeed, rather than changing the issued share capital by small amounts, all three companies have noticeably reduced the number of shares in issue.
| % Fall In Issued Share Capital | |
| LO | -6.70% |
| MO | -1.47% |
| PM | -3.92% |
Lorillard has made the biggest reduction in issued shares, followed by Philip Morris; in fact, PM has embarked on some of the biggest share buybacks in history. Unfortunately, Altria has undertaken the smallest amount of buybacks in the group. These continual buybacks highlight each company’s ability to return cash to shareholders.
Overall
Overall, none of these three companies are seeing a significant reduction in volumes or revenues due to changing tobacco opinions around the world. Altria, Philip Morris and Lorillard continue to announce recored EPS results and return huge amounts of cash to shareholders.
Furthermore, Lorillard and Altria are now diversifying, which removes some of the risk associated with being a pure tobacco play. Philip Morris, on the other hand, is not diversified, although the company is an international player and tobacco consumption in the developing world is increasing.
The tobacco sector is still growing, and despite increasing regulation, shareholders should continue to reap the benefits.
Data Source: Saxo Capital Markets, Marketwatch
The article Big Tobacco Is Still Growing originally appeared on Fool.com and is written by Rupert Hargreaves.
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