Why One Analyst Is Not Buying Big Tobacco

September 12, 2017
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For years, big tobacco has been going up in smoke. “According to the CDC, [smoking rates] plunged from 42% to 15% between 1955 and 2015.” according to the Motley Fool. This dramatic decline has forced major companies such as Altria (MO) to adapt their strategy to stay in the green.

Leo Sun. a financial reporter for the Motley Fool, writes  “As a domestic tobacco company, Altria’s growth is tethered to adult smoking rates in America… To offset those declines, Altria usually raises prices, cuts costs, and repurchases stock to protect its earnings growth — thus ensuring that it can keep paying its dividend. But this strategy can’t last forever. The average price of a pack of cigarettes already hovers around $10 in several states due to rising excise taxes. Altria’s total smokeable product (including cigar) shipments fell 2.7% annually last quarter, with its flagship Marlboro brand and other premium brands leading that decline. Its discount brands experienced the smallest decline (0.5%), indicating that higher prices were impacting consumer choices.”

This means that Altria is finding it difficult to find ways to supplement the decline. To make matters worse, “multinational tobacco giant British American Tobacco (NYSE:BTI) recently acquired Altria’s biggest domestic rival, Reynolds American, to become the biggest publicly traded tobacco company in the world. That merger threatens Altria, especially if British American lowers prices on top Reynolds brands like Newport, Camel, and Natural American Spirit to gain U.S. market share against Altria.”

To find out more reasons why big tobacco may be in jeopardy, and what it means for your money, read more at fool.com.

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