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The Russian Smoking Ban: Will It Snuff Out Big Tobacco Profits?
Posted by: Charles Sizemore (IP Logged)
Date: March 6, 2013 04:24PM
Life hasn’t gotten any easier for Big Tobacco. Last week, Russia became the latest country to impose major new restrictions on smoking in public places. Starting in June, Russians will no longer be able to smoke in restaurants, and cigarette advertising will be banned. I have my doubts as to how strictly the ban will be enforced, but the fact remains that one of the friendliest countries towards public smoking just got a lot chillier. According to the Wall Street Journal, 44 million Russians smoke, and they collectively account for 9% of Philip Morris International’s (PM) profits. Japan Tobacco and British American Tobacco (BTI) get 11% and 8% of their profits from Russia, respectively.
Russians will not quit smoking overnight in response to the ban. That didn’t happen in the United States, and it won’t happen in Russia. It may be years before it makes a serious dent in consumption. But it does blow a major hole in one of the bullish arguments supporting Philip Morris International: emerging markets will not be growth markets for tobacco forever. As countries reach higher levels of development, the costs to the health system prompts a crackdown.
We saw the same in China. In 2011, China banned smoking in restaurants, bars, and in several other enclosed public spaces, though it is still legal to smoke in offices. But there are now plans to ban smoking in virtually all public place, New York City style, by 2015.
Again, we’ll see how strictly it is enforced. Though China has no qualms with crushing freedoms of expression or religion, the right to light up a cigarette is one they seem to let slip.
Latin America? Same. Brazil, Argentina, Chile, and Peru all have bans in most indoor areas, and enforcement is starting to be taken seriously.
India? You guessed it. As of 2008, smoking was banned in most public places, though enforcement has been a little touch and go.
By now, you should be getting the picture. Though enforcement varies from country to country, there is really no such thing as a “tobacco friendly” country anymore. Everywhere you look, the noose is getting tighter.
Sizemore Insights readers know that I have been a Big Tobacco fan for a long time. They tend to be dividend-paying powerhouses with consistent returns. And like other “vice investments,” they tend to be priced as perpetual value stocks, which has made them an outstanding performer in recent decades.
But I don’t advocate buying tobacco stocks at any price. Tobacco stocks have been a great investment precisely because they were cheap and no one wanted them. But you can’t make that argument today. In fact, if anything they have become trendy.
Last month, I wrote that At Current Prices Tobacco is a No-Go, and I want to repeat that sentiment today. Domestic Big Tobacco stocks such as Altria (MO) and Lorillard (LO) trade at a slight premium to the S&P 500 earnings multiple. That simply should not be. These are companies in terminal, albeit gentle, decline.
And Philip Morris International, the “growth stock” of the bunch, trades at a significant premium. Philip Morris trades for 18 times trailing earnings and yields 3.7%. That is simply not a high enough dividend yield to make this stock worthwhile given the better alternatives out there. “Boring” tech stocks like Intel (INTC) and Microsoft (MSFT) both offer higher dividend yields, as do most midstream master limited partnerships.
If Big Tobacco has a substantial price correction, then I might be interested again. But for now, I consider these stocks as toxic as the cigarettes they sell.
Disclosures: Sizemore Capital is long MSFT and INTC.
Stocks Discussed: PM, BTI, MO, LO, INTC,