Tobacco companies all over the world have taken a beating when it comes to their cigarettes and other tobacco products, because there is increased health awareness among customers today. Most of the companies have, therefore, come up with alternatives like e-cigarettes, nicotine gums, non-smoke generating cigarettes and the like in order to keep afloat in the market. These additional products have started to contribute heavily to the incomes of the tobacco companies for the past few years. With so many players in the market, the following are the top three picks for 2015, as rated by experts from RBC, and the main reason they are included in this list is because of their innovative capabilities.
Successful merger
RBC analysts rate Reynolds American Inc. (RAI, Financial) as number one because of various reasons. One of the factors that contributed to the major success of Reynolds is the news doing the rounds in the market about its merger with another tobacco major, Lorillard Inc. (LO, Financial). Going by the news Reynolds is said to have acquired Lorillard for a deal that was worth $27 billion. The deal is still in the working stage and once all the formalities are completed, this could be one of the most solid tobacco companies in the world. As soon as news hit the streets about the possible tie-up between Reynolds and Lorillard, share prices started to shoot up and below is the chart showing the stock movements for the last few months:
Currently, share prices of Reynolds American Inc. are trading at close to $65 per share. RBC analysts expect this to rise up to $78 per share after the acquisition deal comes through. With a dividend yield of 4.05%, this is all set to be one of the best tobacco stocks of 2015, as it is poised to increase the worth of shareholders to a great extent.
The other side of the coin
Just like there are two sides to a coin, an acquisition has two companies that stand to gain or lose. The bigger beneficiary is what we saw above. RBC rates the smaller beneficiary, Lorillard Inc. as the next best tobacco stock of 2015. Lorillard will not only benefit hugely from the merger, but it will also make huge revenues from its menthol cigarettes section. It will retain its position as the market leader of the Newport brand of menthol cigarettes and continue to provide great value to its investors after it has been acquired by Reynolds American Inc. as well. If the deal works out perfectly, Lorillard’s shareholders are in for a pleasant surprise; they will get at least $68.88 profit per share for the deal. The top management of the both the companies and market analysts believe that the Federal Trade Commission will find no reason to reject this approval as the both the tobacco segments of these companies are highly different from each other. Currently Lorillard’s dividend yield is 3.9% and the share prices are trading around the $63 mark per share. RBC analysts predict that this could go up to $70 per share this year due to the combined effect of the deal. The following is the share price trend of Lorillard for the last few months.
Strong dividend growth
The makers of world famous Marlboro cigarettes, Altria Group Inc. (MO, Financial) has been picked up by RBC as the third best tobacco stock of 2015. Two main factors have propelled the growth of this company to a great extent. One is the capacity at which it generates free cash flow and the other is the impressive dividend yield that it has got. The company is one of the best in the business when it comes to dividend payouts. For 2015, Altria Group is expected to repurchase stock worth $800 million during this year, which will further increase the shareholders’ worth to a great extent. The dividend yield of the company is at a strong 4.1% and is expected to climb up steadily during 2015. Currently, the share price of the company is around $50 per share. RBC analysts expect this price to go up to a minimum of $51 per share. The following chart shows the increasing share price trend of Altria during the last few months.
Conclusion
With the tobacco market all set to witness solid consolidations and innovations in 2015, the above three stocks have high chances to succeed. Their active performance and strong earnings will result in share price surges and increased dividend pay-outs, both of which will bring lots of joy to their investors.
