Cigarette companies are new viewed as growth shares as they expand into new territories that are fuelling both sales and profits.
Christopher Columbus had no idea that he would cause a global epidemic when he brought back some "strange leaves" from the New World. But despite all the scientific evidence that tobacco not only kills its users but its non-users too through passive smoking, many people continue to smoke.
In fact, around one in three men in developed countries smoke. And in developing countries the proportion is even higher -- around 50% of men are smokers. This equates to around one billion male smokers in the world. Interestingly, fewer women smoke. It is estimated that about 250 million women around the world are regular smokers. But significantly, there is a worrying trend that more women are taking up the habit in developing countries.
Taken as a whole, smoking is on the rise. This is simply because world population is growing faster than the rate at which smokers are giving up the habit. It is estimated that by 2050, there could be 1.34b smokers worldwide compared to around 1.28b today as global population increases from 6 billion to 9 billion.
While the number of people who smoke may only grow modestly, the same cannot be said of profits at cigarette makers. Gallaher
(LSE: GLH)
, which makes Benson & Hedges, said first-half profits rose 17% as the company exploited demand for cheap cigarettes in eastern Europe. These include countries such as Kazakhstan and Russia where its market share has improved. And in the main, growth in emerging markets has helped to offset falls in Gallaher's traditional market, namely western Europe.
Imperial Tobacco
(LSE: IMT)
is making a concerted push into new territories, too. It recently bought the Davidoff cigarette trademark, which it has been manufacturing under licence from Tchibo Holding for £400m. In April, Imperial Tobacco said it sold 13% more cigarettes in Africa, Asia and the Middle East, which has been fuelled by brands such as Davidoff. It is also eyeing up the US as its two biggest markets, namely the UK and Germany, are being hurt by rising taxes and increased legislation.
British American Tobacco
(LSE: BATS)
, which is the most geographically diverse of the three UK cigarette makers, is also eyeing expansion in developing countries. Over the last five years it has expanded in Malaysia, Nigeria and Russia, which is one of the top five smoking countries in the world. It is reckoned that over 250 billion cigarettes are consumed annually in Russia, which equates to 1,800 cigarettes per head of population every year!
So are cigarette makers a good investment?
In the past, cigarette companies were seen primarily as high-yielding shares with payouts in excess of the market average. This provided investors with a regular income stream, which was their main attraction. But now with valuation clustered around 13 times earnings they are more like growth shares. Nevertheless, Gallaher's 4% yield is still quite attractive, and the yield is marginally higher than that of Imperial Tobacco and BAT, which are currently yielding 3.7%.
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