Tobacco industry: New trends
ACCORDING to the World Health Organization (WHO) statistics, tobacco kills up to half of its users and causes the death of nearly six million people each year, including more than six hundred thousand non- smokers exposed to second- hand smoke. The introduction of the Public Health (Tobacco Control) Regulations 2013, was implemented in an effort to reduce the prevalence of non-communicable diseases by addressing the risks associated with tobacco exposure. Consequently, this will aid in moving Jamaica towards developed- country status in the future by ensuring the health of individuals. In 2006, the United States Surgeon General concluded that there is no risk-free level of second-hand smoke exposure, and that regulating smoking through smoke-free laws and policies is the most effective way to protect individuals from exposure.
Globally, the cigarette market witnessed a decline in consumption in the region of three and a half to four percent. Some of the contributing factors were as a result of the implementation of stricter anti smoking measures, and the heightened awareness of the health risks involved with cigarette smoking.
Despite these measures, the industry is still very vibrant, and continues to make huge profits. It is estimated that industry revenues approach half a trillion dollars. Few investors tend to avoid these companies merely from an ethical standpoint. However, for those who Invest in these companies, the shareholders tend to reap significant returns via dividend payments.
Over the years privatisation, mergers and acquisitions have resulted in the consolidation of the industry. Despite all the negative publicity, these companies continue to flourish as they have learned to diversify into other areas of tobacco technology. As a result, they remain among the most profitable in the world today. There now exist only five major private players, namely Altria/Philip Morris USA, Philip Morris International, Japan Tobacco International, Imperial Tobacco and British American Tobacco. Notably, these companies outperform the rest of the market by over thirty per cent.
Philip Morris International Inc (NYSE: PM), is the leading international tobacco company, and has seven of the world’s top fifteen international brands, including Marlboro, the world’s bestselling cigarette brand. These products are sold in more than two hundred markets. In 2012, the company held an estimated sixteen point three per cent share of the total international cigarette market outside of the United States.
The company recently reported third quarter results that showed the continuation of a very challenging environment. Earnings rose just over five per cent, buoyed by significant pricing strengths, although cigarette sales volume continued to weaken in developed countries. Overall, Philip Morris Inc reported a profit of US$2.34 billion or US$1.44 a share, up from US$2.23 billion or US$1.32 a share, year over year. Revenues increased by 1.6 per cent. Shareholders received a hike in dividend payments of eleven per cent for October. Over the last five years, investors were rewarded with an annualised return of twenty per cent from the company, exceeding the fourteen per cent return on the S&P500.
The Asian market in particular continues to record the largest growth. Recent acquisitions in Mexico and Algeria will strengthen future earnings which fits well with the Company’s long- term strategy.
Recent innovations in technology have given rise to the new craze in smoking – electronic cigarettes, yet another fast-growing segment of the market. Although not a threat to conventional tobacco cigarettes, analysts project that sales of electronic cigarettes could reach between US$1.7 billion and US$1.8 billion by the end of 2013 as sales of traditional tobacco cigarettes remain flat.
Whilst still a small fraction of total tobacco sales, this has not gone unnoticed by some of the larger cigarette producers, who have begun to produce their own brands of electronic cigarettes in a bid to capture early market shares. However, legislation is threatening to extinguish e-cigarettes across the world. Brazil, Singapore and Mexico have banned importing and selling of the devices, even though tobacco is still on sale in these countries. Also, the United States has imposed State level legislation inhibiting the use in different States.
The outlook for the industry continues to be challenging. The continued imposition of taxes and price increases will further aid in the decline in usage. Moody’s expects that developing market growth will help offset sluggish mature markets.
Philip Morris International Inc should benefit from their greater exposure to emerging markets and from their earlier investments in non-traditional products.
Patrick Robins is a wealth advisor from the Wealth Division of Stocks & Securities Ltd. He can be contacted at probins@sslinvest.com