If I am an investor looking at tobacco companies, I have three main companies to look at: Altria Group (MO), Philip Morris International (PM), or Lorillard (LO). Which of these companies will be a good investment in 2012?
If I am looking at dividends as part of the reason for investing in the company, I have Altria at 5.3%, Philip Morris averaging about 3.5%, and Lorillard at 4.6%. There is a big difference in the amount of dividends each company pays out per share. So there is more than just numbers here that I need to consider. How does each company look if I put them side by side for future dividend growth?
Whereas Altria may give the largest dividend per share, Future growth appears to be much greater in Lorillard than the other two companies. This has to be a huge consideration in my investment choices.
Another thing I need to keep in mind is the global marketing that takes place in tobacco right now. Whereas the developed nations are tightening down on tobacco sales through regulatory practices, emerging markets are offering greater opportunity for tobacco growth right now. Smokeless tobacco is gaining in popularity, but it is not a major part of the market yet.
One of the concerns as an investor I have now is the fight against tobacco sales in the developed countries. In the United States alone, here are a few of the regulatory challenges the tobacco companies face:
The Center for Disease Control and Prevention unveiled a $54 million plan to attack the tobacco industry.
The FDA wants the tobacco makers to report the quantities of 93 chemicals in their products. The FDA has decided that it will compile information for each product and make them available to the public by April 2013.
In June 2011, the FDA ruled that tobacco companies in the U.S. had to include that all cigarette labels include a warning that covers the top 50% of a cigarette pack's front and back panels.
This last regulation, if instituted, could be a great blow to the industry. In 2000, Canada initiated a similar law and saw the smoking rate drop 6%. This brings up concerns for me as an investor in tobacco companies. A company like Altria sells in the United States alone.
It is true that Altria is somewhat diversified; the company is also involved in wine sales and bottling. Being the largest shareholder in SABMiller is also beneficial. But presently, a good 70% of Altria's revenue comes from tobacco and only a small portion, 5%, comes from wine and bottling.
Who is going to grow according to what analysts project?
When I look at what analysts have projected for future growth for these companies, I am again drawn toward Lorillard. If I just look at its yearly projections, I see that they are projected to be well above Altria.
So here is the plight I face as an investor: I see Lorillard's growth potential looks better than Altria's. However, it also is only the third largest tobacco company, while Altria holds almost a 50% share of the market. So this growth projection is understandable. At the same time, I need to consider Philip Morris International. It markets internationally, not necessarily competing with the other two. It is projecting healthy growth but may not be facing the regulatory struggle in the United States the other two are facing.
Where would you put your money as an investor?
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.