Outlook for tobacco stocks 'continues to worsen'

Outlook for tobacco stocks 'continues to worsen'

With cigarette sales growth falling in almost every country in the world, the persistently high valuations of tobacco stocks don't make a lot of sense, says Ranger International.


In a note to investors titled Tobacco stocks as melting ice cubes, US fund manager Ranger International said it was “stunned” by the “rapid decay in [tobacco] industry fundamentals (social responsibility aside)”.

The “steep” valuations of tobacco companies were seemingly at odds with the “basic story of falling demand for tobacco products”, the note said.

Year-on-year cigarette sales volume was negative in almost every country measured by Philip Morris and Reynolds America. Turkey, Ukraine, France and Mexico were the exceptions and growth was flat in Indonesia.

“We like to call large companies with falling organic growth ‘melting ice cubes’,” Ranger International said.

“They may be large and many even dominate their industry, but the business environment has changed such that organic growth continues to slide year after year.”

“The challenges faced by [heavily disrupted companies like Eastman Kodak] are well known, yet tobacco companies have persuaded investors that their inevitable decay can be managed.”

Despite being melting ice cubes, tobacco stocks are ‘hot’, Ranger International said.

“Tobacco companies have already borrowed heavily to buy back shares and shrink the annual dividend outlay. How likely is a repeat performance, over say, the next five years?” the fund manager asked.

“In our view, the global trend toward less smoking will only gain momentum. Health organisations and governments are imposing limits on smoking.

“The multi-decade growth story in this industry has turned to one of decay. This dynamic includes emerging markets where growth is no longer strong and currencies have become a headwind.

“Leaving aside the socially responsible concerns of tobacco, why should tobacco stocks be selling at premiums when they historically trade at discounts?”

Read more:

Restructure super tax concessions: KPMG

Ignore Asia at your own peril: PM Capital

Record low rental yields to hit RMBS sector 

Chinese industry to automate rapidly: Mirae Asset

Managed risk income fund launched

 

Outlook for tobacco stocks 'continues to worsen'
investordaily image
ID logo
promoted stories

Appointments

investordaily image

AMP names incoming chief risk officer

Jessica Yun

investordaily image

Antares Equities hires new director

Staff Reporter

Brad Fox

Former AFA CEO appointed to boutique board

Staff Reporter

Analysis

investordaily image

Warning lights flashing on Aussie equities

Roy Maslen

investordaily image

What’s in store for the economy in 2018?

Frank Uhlenbruch

ST Wong

Busting common passive investing myths

ST Wong