Reports last week indicate that cigarette sales in the US are falling more than forecast.
Nielsen reported that volumes declined 11.2% in the last 4 weeks. However, cigarette companies are only reporting declines of about 6 to 7%. Although lower than Nielsen's data these numbers are still significant.
The Cigarette industry is expecting volumes for 2019 to decline in the 5 to 6% range, and about 5% a year for the next 5 years.
Many states in the US are moving to restrict tobacco sales to people under 21 years of age. This will not have a significant impact on cigarette companies as this age group only represents 2% of sales.
One of the main drivers for the decline in cigarette sales is the move by consumers to e-cigarettes.
In the past, cigarette companies have been able to offset lower sales by increasing prices and lowering costs, thereby maintain steady profits. However, these actions will not be effective in the long term. It is not possible to continue increasing prices and reducing costs forever.
The larger companies such as Altria (MO) and Phillip Morris (PM) are scrambling to diversify into healthier products.
Recently MO purchased 35% of the shares in JUUL Labs a vaping company. In December Altria also announced that it was purchasing a 45% stake in Cronos a global cannabis company.
MO has a range of products apart from traditional cigarettes
BTI's product range
The increased revenue from purchases of cigarette alternative companies will probably take 2 to 3 years to realize profits as most of these companies are in the start-up phase.
There is also the risk that US FDA may ban the sale of e-cigarette products until further research is done on the health risks of these products.
That's the bad news. The good news if you hold shares in cigarette companies is that they are still forecasting continued profitability and the ability to pay dividends in the medium-term future. MO successfully realized an 8% price increase recently giving it a 3% improvement in margin in Smokeable products.
Here are some details of dividends and forecast growth figures by analysts for Phillip Morris, Altria and British American Tobacco (BTI).
PM - Annual ROR until December 2020 20% Current dividend 5.6% P/E 16.39
MO - Annual ROR until December 2020 28% Current dividend 6.4% P/E 14.57
BTI - Annual ROR until December 2020 62% Current dividend 7.3% P/E 9.51
All these companies have experienced significant price declines since 2017 resulting in higher dividend percentage returns. BTI is worth a deeper dive if you are looking for a medium-term investment with a high dividend and potential ROR of 62% up to December 2020. The company's P/E is significantly lower than PM or MO.
Cigarette companies continue to show resilience and the ability to cope with market pressures. If you hold shares in this segment I would advise keeping a close watch on companies in this segment in the foreseeable future.
Disclaimer: Please note that I am not a Registered Financial Planner. The articles I write are based on my own personal research and for my own use and is not to be construed as financial planning advice. At all times readers are urged to exercise caution when investing in any financial instruments, to do their own research