as part of our
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%
Philip Morris International's (NYSE:$ PM)
profits. Japan Tobacco and
British American Tobacco (NYSE:$ 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.
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
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 (NYSE:$ MO)
Lorillard (NYSE:$ 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 (Nasdaq:$ INTC)
Microsoft (Nasdaq:$ MSFT)
both offer higher dividend yields, as do most midstream master
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.
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