Never Underestimate Big Tobacco
Jane is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
BigTobacco’s present is sweet.
Take Altria (NYSE: MO). At 33.43, Altria is essentially at an all-time high. It just announced a $18 billion stock buy-back. The whole tobacco category represents the dividend elite, with the major players recently raising their dividends. Altria’s is at $1.52 per share, Reynolds American’s (NYSE: RAI) at $1.55, and Lorillard’s (NYSE: LO) at $1.12. All have been rolling out, test marketing, or acquiring products which could eventually replace the declining revenue from traditional cigarettes. They include Altria’s Verve which contains nicotine but no tobacco. Lorillard is buying electronic cigarette company Blue ECigs. Since the Tobacco Master Settlement Agreement in 1998, the industry has gotten aggressive, savvy, and relentless in managing and even preventing litigation at the federal and state levels. As for state taxing, since that is a significant source of revenue in budget-challenged times, no state will kill the goose which lays the golden eggs.
It’s the future which is uncertain, making investors wary. Motley Fool analyst Sean Williams indicates it might be time to sell Altria. The 24/7 Wall Street Model Diversity Portfolio has dropped Altria.
At the top of the list of concerns is the growth potential. Some stock watchers even raise questions about the sustainability of the dividend and eyes bug. The reality is that smoking cigarettes is declining in major markets such as the U.S. and what’s out there could become more harshly regulated. Both official government agencies and health advocates are flagging the suspected medical threats of new products like Verve. Cash cows such as Marlboro are increasingly vulnerable to the lower-priced Maverick from Lorrilard, Liggett from Vector Group, and Pall Mall form Reynolds. In response to Philip Morris’ mandate on retailers to reduce markups, Canadian convenience store operator Alimentation Couche-Tard launched private label Crown. Early reports indicate Crown is doing nicely.
Whatever investors decide, the reassuring news is that they probably have time on their side to sell or short. It’s unlikely that, in response to these challenges, Big Tobacco will panic. In her breakthrough book “Confidence,” management expert Rosabeth Moss Kanter signals out panic as a major cause of downward trajectories and the reason why companies in that mess can’t turn themselves around.
The reality is that BigTobacco has learned plenty from Marlboro Black Friday, April 2, 1993. On that historic day Philip Morris Chief Executive Officer Michael Miles, concerned about private labels, did panic. He cut the price of Marlboro 20%. This was followed by Marlboro Monday when the stocks of many other consumer product companies built on brands plunged. In contrast, amidst recent threats, the price of Marlboro has been raised, not lowered, to compensate for declining sales.
Since Marlboro Monday and Friday, tobacco’s track record for responding to crisis has kept the industry growing. When I was a communications consultant to Philip Morris in the 1990s, it seemed to have a golden gut about when to fight and when to compromise. There is every reason to anticipate that, like Walgreen (NYSE: WAG), it could develop whole new lines of business. That neighborhood retail drug store responded to the reality of escalating competition and a pricing squeeze by morphing into a healthcare center and convenience store. In some metro locations such as Chicago it is trying out being that Third Place like Starbucks.
Never underestimate Big Tobacco.
janegenova has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
