Best Selling Cigarette Brands Could Suffer from Plain Pack Rules

March 10th, 2016 00:00

Shares of Reynolds American have increased by 40% within the last 12 months, quickly surpassing the S&P 500 and its 6% decrease.
best tobacco brands Income investors are frequently attracted to tobacco stocks for their substantial returns. However if we examine Reynolds' dividend yield to Altria's within the past five years, it becomes evident that the company might waste the favor of considerable revenue investors.

Within the last 12 months, Reynolds paid out $1.4 billion in dividends yet earned free cash flow of negative $99 million. That weakness in cash flow was triggered by the latest $29 billion purchase of competitor Lorillard, which not just tripled Reynolds' debt balance to almost $17 billion. To decrease that debt, Reynolds offered for sale the non-U.S. rights to its Natural American Spirit cigarette brand to Japan Tobacco for approximately $5 billion a year ago. At the same time, Altria's long lasting debt decreased by 6% annually to $12.9 billion.

Negative free cash flow and large debt levels are not possible to stop Reynolds from paying its dividend, however they could decrease payout boosts. Throughout the market recession between 2007 and 2009, Reynolds did not increase its dividend. Last quarter, Reynolds managed 33.9% of the local cigarette market, while Altria stated 51.3%. While bestselling Camel and Pall Mall cigarette brands hold their own against the grand Marlboro business, Reynolds also depends greatly on specialty markets such as menthol cigarettes, "natural" cigarettes, and e-cigarettes.

Newport, for instance, gained within the Lorillard deal, is the bestselling menthol cigarette in America and the second top selling cigarette brand after Marlboro. The addition of Newport helped Reynolds profits rise 41% year-over-year to $3.2 billion last quarter. U.S. smokers continue to pay a lower price per package of cigarettes in comparison to their British and Australian competitors, however bigger excise taxes and stricter packaging polices could both cause local shipments to drop.

Since smoking rates are usually larger among lower-income individuals who are more vulnerable to price increases, larger taxes could result in shipments to drop at a quicker rate than Reynolds and Altria can alter their prices. In addition, if the United States passes the "plain packaging" plan employed by a number of other countries, premium brands including Camel and Newport could lose ground to less expensive brands.

By Clark Smith, Staff Writer
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