He is rugged, independent and rides horseback far across the American West. He inhabits a world of vivid sunsets and canyons, chain-smoking along the way as he lights up one of the 20th century’s most famous marketing campaigns.
David Millar, the real-life Marlboro Man, died of emphysema years ago and the advertising campaign was stubbed out in 1999 when Philip Morris, the brand’s owner, was forced to accept strict new marketing rules. But Marlboro Man rides on, both in popular imagination and as a symbol of Big Tobacco’s financial clout.
These days, Americans are smoking fewer cigarettes. With adult smoking rates in the United States hovering around 15 per cent, down from 25 per cent in 1995, cowboys are almost as likely to be vaping or smoking cannabis as traditional cancer sticks.
Nevertheless, tobacco groups such as Philip Morris and British American Tobacco, its biggest rival after a $49 billion takeover of Reynolds American last year, still wring huge profits out of North America, where, despite lower volumes, tobacco revenues are surging thanks to years of price rises.
According to Euromonitor, the number of cigarettes sold in the United States fell by 37 per cent between 2001 and 2016. Over the same period prices per packet rose, lifting revenue by 32 per cent to an estimated $93.4 billion last year, a big chunk of the $700 billion global market.
Despite there being fewer smokers in the more health-conscious US these days, the tobacco business is booming and yesterday BAT, owner of the brands Lucky Strike, Pall Mall and Dunhill, suggested that recent smoke signals surrounding the industry had been positive. It said that President Trump’s tax cuts would boost earnings per share by 6 per cent in 2018. That equates to about £400 million or 2 per cent of total sales — a fillip that could help BAT to compete more aggressively in the growing market for what the industry likes to call next-generation products: e-cigarettes, vaping devices and other nifty tobacco gizmos in which the group is investing big money.
BAT aims to find £500 million in revenue from the next-generation business this financial year, rising to more than £1 billion in 2018 and £5 billion in 2022. It expects the division to break even by the end of this year and to deliver what it described as “substantial profit” by 2022. Its plans are more developed than those of Philip Morris, which many sector analysts think is dragging its heels on next-generation products.
The tax cuts could not have come at a better time for BAT. Having recently integrated Reynolds American, the company is more heavily exposed to the American market than it has been for nearly two decades. Meanwhile, it retains a strong presence in emerging markets such as Indonesia, Egypt and Pakistan, where rising populations and incomes are driving robust sales of traditional cigarettes.
To many observers, outside the City in particular, tobacco may feel like a dying industry, but its appeal to investors unfazed by the obvious ethical concerns remains clear: a track record of coughing up chunky dividends year-in, year-out.
At £49.59½, shares in BAT may not be particularly cheap, but they are 12 per cent less than the high of £56.43 in June. There are risks, of course, not least a bribery investigation being undertaken by the Serious Fraud Office into its activities in Kenya. US Food and Drug Administration plans to regulate nicotine to non-addictive levels also could be a swerve-ball. That said, tobacco companies have proved remarkably adept at shrugging off such regulatory threats in the past to ride boldly on.
ADVICE Buy
WHY BAT remains well positioned to benefit from US tax cuts and the recent takeover of Reynolds American
Stock Spirits Group
Stock Spirits Group is that ultimate initial public offering cliché: a private equity-owned group that floated, got off to a decent start in year one before stumbling badly in year two. The shares have recovered only in the past few months, rising past the 235p at which they were first offered for sale in 2013.
A price war in Poland, its biggest market, was among its main problems, but Stock, which specialises in selling spirits and liqueurs across eastern Europe, was able to announce in its pre-close trading statement yesterday that its Polish business business had performed well.
It’s hard to say that a line can be drawn under its Polish problems, because of the unpredictability of Stock’s biggest competitor there, Roust. In the past year Roust has filed for bankruptcy protection, come out of bankruptcy, fired most of its senior management and announced price increases. Whether those price increases will be implemented and stick remains to be seen. If so, it would be great news for Stock.
The company’s other big market is the Czech Republic, which also performed well. However, there was no update for Italy, where it has struggled because of its lack of scale and the country’s economic issues. Selling trendy flavoured vodka to younger drinkers is difficult with youth unemployment at 40 per cent.
Stock was seen initially as a mini-Diageo, capable of snapping up and revitalising brands, but its difficulties mean that an acquisition strategy has been put on hold. Only two small deals have been done in the past eighteen months. Nevertheless, it has the firepower to speed up here: strongly cash-generative, it brought down net debt to €53 million from €60 million in the year.
The company looks on track to report earnings per share of 15.8p in respect of the year just gone and to produce a total dividend of 8p. After the 7½p rise in the share price to 272p, they trade on a multiple of 17 times 2017 earnings and yield 2.9 per cent. That looks about fair, given the uncertainty about Poland and Roust. The shares have risen by 150 per cent since the depths of the Polish setback and look pretty up to date with events.
ADVICE Hold
WHY Good recovery, but doubts about market solidity
