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I have read that with the reduction in nicotine, tobacco stocks will actually benefit from a host of new products becoming available such as heat not burn. Any thoughts on this?
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Estimates from Value Line for sales growth for Altria (MO) and British American Tobacco (BTI) are in the 2% to 7% range. The higher estimate is for BTI due to its earlier adoption of e-cigarette products.
A little research found that tobacco use world wide is decreasing with the exception of China. I also found information from a World Health Organization (WHO) survey of world wide tobacco use. WHO found some information that does not bode well for tobacco. Among smokers world wide 70% of those who knew of the adverse health effects of tobacco wanted to quit. In China the WHO found 70% of smokers were NOT aware of the health issues associated with tobacco use. A bit of consumer education means tobacco companies will have over half of their customers wanting to quit. With lower nicotine levels in new products it will be easier to quit.
I also found smoking less prevalent among the high socio-economic classes in both developed and developing countries. Going forward tobacco use is likely to have an image problem also.
I do not know if this is still true but several years ago I heard a report that China was starting to discourage smoking. This was at a time China had a state tobacco monopoly. This seemed a bit weird as they would have a vested interest in more smoking. However, the health care costs from smoking were projected to outstrip profits from tobacco sales. I have not heard anything recently so I do not know if discouraging smoking really got started and continues in China.
I will gladly admit to a bias against this industry. However, looking at these companies and trends I do not think they are good investments unless you are looking for slow but fairly steady growth with good dividends. Any new products will need to be very well accepted to get these companies into a growth mode. I do not think that will happen. Cities and states in the US are starting to treat e-cigarettes the same as cigarettes. Some well publicized exploding e-cigarettes doesn't help either.
Russell Malley
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