Tobacco Mega-Merger Sparks Investment Opportunity
They may be the bane of the surgeon general’s existence, but the fact is, Americans can’t get enough of their favorite smokes. Even in the face of negative health effects, almost 20% of Americans chose to light up in 2012. In fact, more than 293 billion cigarettes were sold in the U.S. in 2011.
And it’s no secret that the industry has staying power. Sure, the number of smokers has declined over the years (down from 24% in 2005), but profits have never been higher. In 2010, the industry pocketed about $35.1 billion from consumers.
To put it in context, that’s about the same combined amount that The Coca-Cola Company(NYSE:KO), McDonald’s Corporation(NYSE:MCD) and Microsoft Corporation(NASDAQ:MSFT) made that year. If profits from tobacco products represented a country’s gross domestic product, it’d outrank or break even with Saudi Arabia’s, Sweden’s and Venezuela’s GDPs.
Last year, the U.S. cigarette market was valued at more than $66 billion.
Those numbers fly in the face of movements to curtail cigarette use. It seems that no matter how many public service announcements the government makes, there will always be a diehard group of smokers.
“The trend over the past 30 years,” says Vice Fund Portfolio Manager Gerry Sullivan in a CNN interview, “is that [even] when demand goes down, the tobacco companies can raise the price and produce more profit.”
That’s good news for investors, who got a shock this week when Lorillard Inc.(NYSE:LO) and Reynolds American, Inc.(NYSE:RAI) - two of the three biggest U.S. tobacco companies – announced they would be merging to better leverage their strengths.
Smoking may be hazardous to your health, but your portfolio is a different story. Here’s what you