Light up Your Portfolio with Cigarette Stocks
Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
While cigarette companies such as Philip Morris International (NYSE: PM), Altria Group (NYSE: MO), British American Tobacco (NYSEMKT: BTI), Lorillard Group (NYSE: LO) and Reynolds American (NYSE: RAI) have detractors, it has certainly not lessened the appeal of these stocks to institutional investors such as mutual funds, endowments and pension groups.
Lorillard Group has an institutional ownership level of over 95%. Philip Morris has institutional ownership of over 70%. For Altria Group it is almost 60%. Reynolds American has institutional ownership checking in at 46.42%. When institutional investors buy a stock, that is very bullish for the company. Institutional investors are courted by companies as it is an imprimatur of approval when a stock is bought. In addition, institutional investors are, in general, long term investors. This adds stability to the stock.
The reasons for the appeal of cigarette companies to institutional investors are the same as for attracting individuals. A major factor is the dividend income provided. The average dividend for a member of the Standard & Poor's 500 Index is around 2%. The dividend yield for Reynolds American is 5.12%. Altria Group pays a dividend of 4.57%. For Lorillard, Inc., the dividend is a 4.50%. British Tobacco pays a dividend of 3.85%. Philip Morris International provides dividend income to its shareholders at a rate of 3.46%.
Asia is a huge growth market for these companies, and it is growing. For Phillip Morris, sales in Asia have risen by 35%. Wells Fargo Analyst Bonnie Herszog projects that Asia revenue will double for Phillip Morris by 2020 to $18.7 billion. In addition, Phillip Morris is making deeper inroads into the China market, which will be huge.
Earnings-per-share growth has also been strong. Philip Morris International has earnings-per-share growth that is soaring by 17.48% on a quarterly basis and is up 23.58% this year. For Lorillard, Inc., earnings-per-share are increasing by 17.82% this year. British Tobacco has its earnings-per-share growing by 8.52% this year. Earnings-per-share growth for Altria Group is improving by 6.52% on a quarterly basis. Reynolds American has earnings-per-share growth of 5.07% this year.
This earnings-per-share growth has resulted in healthy profit margins, too. British Tobacco American has a profit margin of 21.92%. Lorillard, Inc. has a profit margin of 16.89%. For Reynolds American, the profit margin is 15.60%. Altria Group has a 14.40% profit margin. The profit margin for Philip Morris International is 11.72%.
Even more impressive than the double digit profit margins for these stocks and the earnings-per-share growth is the return-on-equity (ROE). ROE is important, according to Rex Moore of Motley Fool, as it "helps us determine how well management creates value for shareholders." The average ROE for a company is about 15% with the higher the better. Philip Morris International has a staggering ROE of 427.97% (present shareholders should enjoy it but not expect it to last). For Altria Group, the ROE is 74.59%. British American Tobbaco has a ROE of 35.63%. The ROE for Reynolds American is 20.97%.
The above averages ROEs, double digit profit margins and earnings-per-growth evince the wide economic moat that benefits the shareholders of these companies. The barriers-to-entry in the cigarette industry are formidable. The regulatory and legal barriers alone are daunting. Establishing a brand name to challenge those like the Marlboro Man of Philip Morris International and Newport of Lorrilard, Inc, just two examples, are prohibitive. As to the value of the brands, "...second only to Coca-Cola, Marlboro has become the world’s second-largest brand, its brand value up to 500 billion dollars."
In addition to the brand value, cigarette companies have tremendous pricing power resulting from the double digit profit margins. While allowing for healthy dividends, this also facilitates robust discounts and specials to secure a costumer base. This also serves to ward off any challengers.
Cigarette companies are particularly appealing in low growth epochs. Consumers tend to allow themselves relatively expensive pleasures of a quotidian nature like cigarettes while curtailing big ticket expenditures such as a vacation home or boat. This combined with the high ROEs, double digit profit margins, increasing earnings-per-share growth and above average dividend incomes provides the allure of cigarette companies to both institutional and individual investors.
jonathanyates13 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Philip Morris International. 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.
