Imperial Tobacco Group PLC (ADR) (NASDAQOTH:ITYBY) has been more focused on the European market, which is why the company has taken a huge hit in terms of volume declines, with a 5.9 % shipment decline. However, lately the company is exploring opportunities in the emerging markets, relying on price increases and growth in these regions to offset declining consumption and government levies, particularly in Western Europe and North America.
Competition
| Indicators | Philip Morris | British American Tobacco | Imperial Tobacco |
|---|---|---|---|
| Price/Earnings TTM | 17.0 | 17.9 | 45.5 |
| Price/Book | -33.8 | 8.7 | 3.4 |
| Revenue Growth (3 Yr. average) | 7.6 | 2.3 | 24.7 |
| Income Growth (3 Yr. average) | 11.5 | 12.3 | 0.8 |
| Return on Equity | – | 47.3 | 7.0 |
| Dividend Yield | 3.8% | 4.0% | 5.0% |
| Current Price | $88.23 | $107.06 | $67.78 |
*Data from Morningstar on July 22
Dividends and revenue
British American Tobacco PLC (ADR) (NYSEMKT:BTI) provides a decent and modest dividend as compared to its rivals. The dividends have been increasing at a prudent ratio due to continuous profitable operations in emerging markets. Philip Morris International Inc. (NYSE:PM) has provided a constant dividend yield over a period of time; to the contrary Imperial Tobacco Group PLC (ADR) (NASDAQOTH:ITYBY) has been constantly cutting its dividends to retain cash to fuel its downward trending operations.
However, the company has shown a hefty increase in its revenue due to growth in fine-cut tobacco and Snus; plus it has also achieved revenue growth in certain key regions. British American Tobacco scores the highest in the net income metric, due to its diversified operations all across growing emerging and Asian markets. British American Tobacco, with a 65% payout ratio supported with a healthy free cash flow, is in a much better position to offer the stated amount of dividend yield.
Final thoughts
A price increase in the US and a recession-hit European economy provides an unfavorable environment for the tobacco companies to operate in. Imperial Tobacco Group PLC (ADR) (NASDAQOTH:ITYBY) is more exposed to the developed markets, where tobacco use is stigmatized and is on a decline. Apart from that, it leaves the company more vulnerable to business headwinds from lower demand in these markets. However, British American Tobacco and Philip Morris are well positioned in the growing emerging markets to contain the demand declines.
On another note, tobacco use altogether is gradually declining, with demand gradually shifting towards tobacco alternatives. British American Tobacco has been is in the tobacco-alternative industry for quite some time now, producing and marketing e-cigarettes. Hefty investments have been made in next generation tobacco products by British American Tobacco in an attempt to add sustainability to its operations.
Furthermore, Philip Morris and Imperial Tobacco have also been exploring opportunities in the tobacco-alternative industry; however British American Tobacco, being the first mover, has a larger market share as well as added advantage over its competitors. So in my opinion, British American Tobacco is better poised for long-term growth; hence, it is my pick of the day.
The article Tobacco Companies Might Interest You originally appeared on Fool.com and is written by Zain Raza.
Zain Raza has no position in any stocks mentioned. The Motley Fool owns shares of Philip Morris International. Zain 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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