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Penny Sleuth
Penny Sleuth
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Imperial Tobacco -- An International Tobacco Giant That Will Do Better Than Philip Morris International

October 05, 2010 | About:

Lately, I’ve been asking my Lifetime Income Report readers to email us questions and comments regarding their holdings. I got a few great responses. But this one just stuck out to me:

My defense portfolio includes MO, PM and VGR. No matter how bad the economy gets, smokers will not stop smoking — in fact, they will smoke more. Also, Europeans and Asians are still smoking like crazy and don’t have the restrictions we have about public smoking. — L.Q.

Agreed. That’s why we’ve been long British American Tobacco in the past — a stock my readers cashed out for a 46% gain.

All three this reader mentions, Altria, Philip Morris Intl. and Vector Group, are interesting, high-yielding tobacco plays. And we couldn’t agree more that now is the time to look into these types of opportunities.

But I have one specific problem with two of these companies. I worry, as this reader does, about the future of the American tobacco industry. Increased restrictions and anti-smoking campaigns have started to take a toll on companies like Altria and Vector, which both sell primarily to U.S. consumers.

Philip Morris Intl., on the other hand, is in a great position for coming years. It is the world’s largest publicly traded cigarette manufacturer — with operations in Eastern Europe, Africa, Asia and Latin America. The industry giant just raised its dividend yet again — to 64 cents per share, or a 4.5% yield. It’s seeing volume explode, especially in its Asia segment — up 35% by volume in the most recent quarter.

That said, I still don’t think that’s the best way to play the tobacco industry…

PM is big. We’re talking $102 billion big. And while I normally like large, established companies, I want the absolute best opportunities in each industry we follow. PM’s product portfolio consists of some of the most well known brands worldwide — everything from Marlboro to Chesterfield. But premium brands aren’t as popular in emerging markets as value brands. PM’s lower-cost brands don’t make up enough of its revenue to make us feel comfortable. Imperial Tobacco (ITYBY), however, is the giant in the value market.

Our U.K.-based tobacco giant controls a whopping 46% of the value brand market and 35% of the economy brand sales in the U.K. Similar results are found across each geographic area — including far-off emerging economies like Saudi Arabia and Taiwan.

The best part of Imperial’s business plan is its focus on fine-cut tobacco, or loose tobacco. With pre-rolled cigarette prices skyrocketing, it’s much more economical to roll your own. This is a trend that continues to gain traction around the world.

In the U.K., 5 million smokers roll their own smokes. That number doubled in the last 16 years, as almost every other tobacco figure has started to fall off. And in emerging countries like Indonesia, the number of roll-your-own (RYO) cigarette smokers is just starting to take off. Just because more people are coming into the middle class doesn’t mean they want to spend all their new money on top brands.

So instead of investing in the top brands in the world today, a more sustainable approach is to go after the value and RYO markets, which are flourishing. No one does that better than Imperial.

We expect to hold this play for years to come. As reader L.Q. pointed out, “No matter how bad the economy gets, smokers will not stop smoking — in fact, they will smoke more.”

All of that said, I’m not recommending that my readers pick up shares at current prices. As of today’s open, we’re already up double-digits on the stock (not even counting the company’s dividend payouts), and I’d be remiss in suggesting that new investors buy in at a double-digit disadvantage to my readers.

That said, I’m about to recommend a new play to my Lifetime Income Report readers – as well as one special government-backed Scandinavian Income investment that could put thousands of dollars in your pocket each month. To learn more about these income opportunities, check out the Lifetime Income Report website…


Jim Nelson

Penny Sleuth

Rating: 2.9/5 (8 votes)


Munger - 6 years ago    Report SPAM
You are playing Imperial via pink sheets? If so, dividends arrive as normal for pink sheet listings?

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