{"id":40076,"date":"2013-07-16T10:39:13","date_gmt":"2013-07-16T14:39:13","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/?p=40076"},"modified":"2013-07-16T10:39:13","modified_gmt":"2013-07-16T14:39:13","slug":"plain-packaging-an-assault-on-big-tobacco-branding","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2013\/07\/16\/plain-packaging-an-assault-on-big-tobacco-branding\/","title":{"rendered":"Plain Packaging: An Assault on Big Tobacco Branding"},"content":{"rendered":"

By The Sizemore Letter<\/u><\/a> <\/p>\n

Last month, I wrote that Australia\u2019s plain-packaging law was one of the worst setbacks for Big Tobacco in decades because it attacked the companies\u2019 single most valuable asset: their brands<\/a>.<\/p>\n

Big Tobacco has strong enough moats to survive high taxes, punishing lawsuits, and an aging and declining customer base intact.\u00a0 But plain packaging threatens the industry at its very core, and this is something underappreciated by investors in the sector.<\/p>\n

\"James<\/a><\/p>\n

Cigarette Marketing 101<\/p>\n<\/div>\n

Long-time chain smokers light up for one very obvious reason\u2014they are addicted to the nicotine.\u00a0 But for casual smokers\u2014those who may light up while drinking, for example\u2014the experience matter too.\u00a0 I call it the \u201cRebel Without a<\/i> Cause<\/i> effect\u201d<\/strong>; the devil-may-care image that goes along with smoking is part of what makes it pleasurable.<\/p>\n

There is a certain appeal to Altria\u2019s ($<\/span>MO<\/a>)<\/b> familiar Marlboro logo.\u00a0 But there is most certainly no romance in a plain white box with a picture of a diseased lung on the flipside.<\/p>\n

If you think I\u2019m making this up, consider the recent grumbles coming out of Australia.\u00a0 Following the implementation of the plain packaging law at the beginning of this year, Aussie smokers \u00a0have complained that their cigarettes taste different<\/a>.<\/p>\n

The Australian health minister, quoted by the New York Times<\/i>, insisted that there had been no change to the cigarettes themselves but that \u201cpeople being confronted with the ugly packaging made the psychological leap to disgusting taste.\u201d<\/p>\n

I\u2019m not a cigarette smoker, though I do enjoy the occasional cigar.\u00a0 And I would insist that a cigar does indeed taste better when the smoker is wearing a suit and sitting in a comfortable leather chair surrounded by wall-to-wall shelves of old books.\u00a0 The very same cigar smoked in a plastic lawn chair while wearing Crocs just isn\u2019t the same (and shame on any grown man for wearing Crocs outside of the pool, but I digress).<\/p>\n

Rational?\u00a0 No.\u00a0 But nonetheless true.<\/p>\n

It remains to be seen whether plain packaging laws spread outside of Australia; they are being considered in Canada, India, the UK and in the European Union as a whole.\u00a0 Big Tobacco wll argue that the ban violates their trademarks and seizes their intellectual property, and they may find a few sympathetic judges.\u00a0 But given the history of the anti-tobacco movement, it\u2019s a lot more likely that Big Tobacco will fight a rearguard action for years before ultimately losing.<\/p>\n

So, if the future is bleak, does this mean that you should avoid tobacco stocks like Altria, Reynolds American ($<\/span>RAI<\/a>) <\/b>or Lorillard ($<\/span>LO<\/a>)<\/b>?<\/p>\n

Not necessarily.\u00a0 As I\u2019ve written before, industries in decline can be fantastically profitable investments under the right set of conditions<\/a>.\u00a0 But the most important condition is price, and on this count Big Tobacco looks far from attractive.\u00a0 Altria, Reynolds American and Lorillard trade for 17, 19, and 15 times earnings, respectively.\u00a0 Their dividends, while high by broad market standards, are all lower than 5%, and all are trading near their 52-week highs.<\/p>\n

Dividend income is a major consideration in my investment process, but I am avoiding Big Tobacco at this time.\u00a0 I can get higher yields with comparable dividend growth rates in select REITs and MLPs<\/a>, and I can get a much higher dividend growth rate in Big Tech names like Microsoft ($<\/span>MSFT<\/a>), Intel ($<\/span>INTC<\/a>) <\/b>and Cisco Systems ($<\/span>CSCO<\/a>)<\/b>.<\/p>\n

Do I expect Big Tobacco stocks to take a nosedive in the immediate future?<\/p>\n

No, I don\u2019t.\u00a0 I expect the sector to more or less track the market in the short term.\u00a0 But Big Tobacco investors should be aware that the single biggest factor in the sector\u2019s outperformance of recent years\u2014price\u2014is no longer in their favor.<\/p>\n

Sizemore Capital is long MSFT, INTC, and CSCO.<\/p>\n

SUBSCRIBE\u00a0<\/b><\/a>to\u00a0Sizemore Insights<\/em>\u00a0via e-mail today.<\/p>\n

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