Tobacco and Spirits – Investors Can’t Afford to Ignore Them
Larry is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
So-called sin stocks tend to hold up well, whatever the economy is doing. Citizens want their booze, and even after all the relatively new anti-smoking laws, their tobacco.
With cigarettes, there’s concern that some day no one will smoke them. Just as barbers no longer bleed people, to remove an evil psyche. But it’s reasonable to expect that the U.S. smoker demographic is down to a hardcore group that will shrink no more. Here in the U.S., the Food and Drug Administration now regulates the tobacco business. This oversight, in my opinion, has legitimized the U.S. tobacco business. Also, smoking in developing nations is increasing. Investors should be keen to the notion that China has over 350 million citizens who smoke – that about equals the entire U.S. population.
Liquor, of course, is ubiquitous. With Prohibition a distant historical event, the alcohol industry is high on the social acceptance scale. Several states are wrestling with whether to expand liquor sales to supermarkets, a boon to sales.
Among the best spirits companies is a relatively new one, although its storied brands have been around for quite some time. Beam Inc. (NYSE: BEAM), who spun off from Fortune Brands in early October 2011, has seen its stock surge about 35% since then. More appreciation likely is on the way.
Its product portfolio includes such premier brands as Jim Beam bourbon, Makers Mark whiskey, Canadian Club whiskey, Courvoisier Cognac and Sauza tequila (which ranks second behind privately owned Jose Cuervo). Beam generated healthy 2011 sales of $2.8 billion and earned $2.12 per share in profits for shareholders. For the first half of 2012, revenues adjusted for foreign exchange and acquisitions rose 8% and profits increased 23%, to $1.11 per share.
Jim Beam grew 11% and Maker’s Mark 29%, January through June. For Beam’s rising stars, Pucker Vodka and Skinny Girl, sales were up 17% and 81%, respectively. Beam currently yields 1.30% for shareholders. There’s a case that Beam makes a compelling acquisition candidate for the likes of global spirits makers Diageo PLC or Pernod-Ricard SA.
Each of the biggest U.S. tobacco companies maintains a commitment to increase shareholder value through share repurchases and increasing stock dividend payouts.
My family and I recently returned from a trip to London and Paris. Smoking is indeed alive and well in these old European cities. Even though most of the European Union is experiencing economic difficulty, smokers are not cutting back. In particular, many prefer and continue to purchase the premier brands.
Altria Group (NYSE: MO) reported 2011 profits of $1.64 per share on $23.8 billion in revenue. For the first half of 2012, it had profits of $1.08 per share on $11.0 billion in revenue. Market share was flat, and cigarette volumes decreased again slightly. But profits rose as the company instituted tight cost controls and price increases. Excluding special items, earnings climbed 10.2% to $1.08. Altria yields 4.7%.
Philip Morris International (NYSE: PM) in 2011 earned $4.88 per share on $31.1 billion in revenue. For the first half of 2012, the company earned $2.60 per share, up 7.4%, on $15.6 billion in revenue. During the last quarter, the company also announced a new three-year share repurchase program of $18 billion. For this year, PM plans to repurchase $6 billion worth of shares. In 2012, PM expects to earn in a range of $5.10 to $5.20. It currently yields 3.3%.
Stock in Lorillard Inc. (NYSE: LO), the makers of Newport cigarettes, dropped about 10% after its July 25 earnings report didn’t prove as robust as Wall Street projected. That came after a solid year-long advance. Its first half 2012 results were $3.87 per share, up 5.9%, on $3.25 billion in revenue. Lorillard continues to gain market share with its brands and now totals 14.3% of U.S. tobacco sales. Lorillard currently pays its shareholders $1.55 per share each quarter for a yield of 5%.
Lorillard also completed its acquisition of Blu e-cigs in the second quarter. Blue e-cigs is the best-selling e-cigarette brand. They have the look and feel of traditional cigarettes, but without the tobacco smoke, ash or smell. E-cigarette sales grew very fast over the past several years, approximately doubling every year. It is estimated that by 2013, e-cigs will have approximately 6% market share of the U.S. tobacco market.
In all, a good case can be made for sin stocks.
Peter A. Delgado II is the founder and principal of Threshold Capital Corp. in Glen Ridge, N.J. His firm has positions in these stocks. www.thresholdcapitalcorp.com
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