This has been a big year for tobacco stocks.
Two major events have had a significant impact on the tobacco industry in 2014. First, the rise of the eCigarette industry has led all of the major tobacco companies to enter the market for eCigarettes. Second, the sale of Lorillard (NYSE: LO) – in two pieces – is a major shakeup for the industry and for tobacco stocks.
With the beginning of the fourth quarter I think it makes sense to take a look back at how tobacco stocks have performed in 2014.
Let’s start with an introduction to the big tobacco stocks and their year-to-date performance in 2014. The table below offers key metrics on each major tobacco stock including ticker symbol, market capitalization, price-to-earnings ratio (PE) and dividend rate.
Of course, this is just a snapshot. How have these stocks fared thus far in 2014? The chart below features YTD returns for each of these companies. It also features the YTD return of the S&P 500 for comparison.
In a nutshell, this chart shows that both British American Tobacco (NYSE: BTI) and Phillip Morris International (NYSE: PM) have failed to outperform the S&P 500’s 6% YTD return in terms of price appreciation. But when you include dividends, British American Tobacco managed to squeak out a net win over the S&P 500.
As you can see from the chart the remaining tobacco stocks – the American tobacco stocks – have outperformed the S&P 500. And handily.
Tobacco Stocks: Lorillard
The big news out of the tobacco industry this year has been the speculation – and confirmation – of an acquisition of Lorillard by Reynolds American (NYSE: RAI). Though Lorillard shares remain up almost 18% YTD, they were actually considerably higher prior to the official announcement of its acquisition. It was truly a “buy the rumors, sell the news” kind of situation.
The stock was up more than 32% for the year when the Reynolds American deal was announced, news that sent shares lower by almost 10.5% in one day.
The Wall Street Journal summed up the deal nicely.
“The transaction would add Lorillard’s Newport, the No. 2 U.S. cigarette brand, to Reynolds’s portfolio, which includes Camel and Pall Mall cigarettes, giving Reynolds a commanding position in popular menthol smokes, which have been stealing share from unflavored cigarettes.”
But it is considerably more complicated than that, as the deal involves four tobacco companies. Lorillard will sell Newport and several other brands to Reynolds American. Meanwhile, Imperial Tobacco (OTCMKTS: ITYBY) will buy Blu eCigs.
Additionally British American Tobacco will invest an additional $4.7 billion in Reynolds American to maintain its 42% stake in the company.
With approval needed from shareholders of Lorillard, Reynolds American and Imperial Tobacco and approval needed from a whole host of regulatory bodies, the deal isn’t even expected to close until mid-2015 even though it was announced in July.
Wells Fargo maintains its estimate of $10 billion in eCigarette sales by 2017. Bloomberg Industries forecasts that eCigarette sales will eclipse traditional cigarette sales as soon as 2023.
How have the major tobacco companies reacted?
As you can expect, the major tobacco companies haven’t sat idly by as eCigarettes boom and traditional cigarettes continue their slow decline. Today, all of the major tobacco companies have entered the market for eCigarettes in some form.
Altria (NYSE: MO) has its MarkTen brand. Lorillard has its Blu eCigs brand – though this brand is on its way to Imperial Tobacco Group. British American Tobacco has its own brand called Vype. Phillip Morris International purchased Nicolite earlier this year but is also rumored to be releasing a Marlboro branded eCigarette by the end of 2014.
Reynolds American clearly prefers its Vuse brand over Lorillard’s Blu brand, as it was more than willing to sacrifice Blu in order to make the acquisition of Lorillard happen.
Tobacco Stocks: The Bottom Line
With all of the American tobacco companies significantly outperforming the S&P 500 in 2014, it is safe to call this a strong year for tobacco stocks. Tobacco investors enjoy significantly higher dividend payouts than that of the average S&P 500 company, currently 1.91%.
But for this yield they must accept regulatory uncertainty and the risk that, someday, people might just listen to the science and health warnings and quit smoking en masse.
Until then, tobacco stocks continue to be a great way to grow steady, long-term wealth.
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