#$rai

The U.K. group's $47 billion bid for the outstanding shares in the maker of Camel reunites a raft of advisers to Big Tobacco.

By Laura Board & David Marcus

Two M&A bankers who recently defected to Centerview Partners will be reunited with former colleagues at UBS on the same side of the negotiating table as British American Tobacco plc (BTI) attempts to convince independent directors of Reynolds American Inc. (RAI) of the merits of its $47 billion stock-and-cash offer for the outstanding 57.8% stake.

Nick Reid, who joined Centerview from the Swiss institution in 2014 to expand his new firm's U.K. client base, and Hadleigh Beals, who followed in 2015, join Centerview co-founder Blair W. Effron on the job. The mandate reunites the defectors with former UBS colleagues including John Woolland and James Robertson. Meanwhile, Centerview's Effron represented Lorillard Inc. on its $27.4 billion takeover by Reynolds American, which closed in June 2015. That deal handed a supporting role to BAT and also to the U.K.'s Imperial Tobacco plc, now Imperial Brands plc. (BAT invested $4.7 billion in Reynolds American to maintain its stake at just over 42% after the Lorillard fusion, while Imperial bought assets).

While at UBS, both Reid and Beals advised BAT, with Reid working on its acquisition of Indonesia's Bentoel Group, and both bankers representing the London company in the merger of Reynolds American and Lorillard.

Reid was co-head of UBS' European investment banking business before his move to Centerview. Prior to UBS, Reid was at Goldman, Sachs & Co. in London, where he led the U.K. investment banking business.

BAT's other financial advisers on the Reynolds American buyout include Deutsche Bank AG's Nigel Meek, James Ibbotson, Matt Hall, Jimmy Bastock and James Stynes. Meek and Ibbotson advised BAT on its $2.7 billion buyout last year of the outstanding 24.7% stake in Brazilian affiliate Souza Cruz SA, during which intervention from Aberdeen Asset Management plc forced BAT to lift the offer. The Deutsche bankers also represented BAT in the Lorillard/Reynolds American transaction. UBS' Robertson and colleagues also worked on both those two deals.

Legal matters are being handled for BAT by a Cravath, Swaine & Moore LLP team led by Philip A. Gelston, David J. Perkins, Ting S. Chen and Alyssa K. Caples and by a Herbert Smith Freehills team including James Palmer, Gillian Fairfield, Alex Kay and Isaac Zailer.

Cravath, Swaine lawyers including Gelston and Chen advised British Tobacco on Lorillard/Reynolds American. In that deal the two lawyers also advised on Reynolds American's related sale of the Kool, Salem, Winston, Maverick and Blu eCigs brands and other assets to the-then Imperial Tobacco.

Gelston's involvement with Reynolds American goes back even further. He advised BAT in 2004 when it combined its Brown & Williamson Tobacco Corp. with RJ Reynolds Tobacco Holdings Inc. in a $6.6 billion deal to create Reynolds American.

In the latest Big Tobacco transaction the Cravath lawyers find themselves once again opposite Jones Day, which is advising Reynolds American and which advised RJR on the 2004 merger with Brown & Williamson.

The Jones Day legal advisers are led by Randi Lesnick and Lizanne Thomas; Reynolds American's bankers were not immediately available. Jones Day's long history with Reynolds American also includes advising it on the Lorillard merger and on its September 2015 deal to sell the Natural American Spirit brand to Japan Tobacco for $5 billion, on which Lesnick advised.

Jones Day also advised Reynolds American in 2011 when it sold subsidiary Lane Ltd. to Scandinavian Tobacco Group A/S for $205 million and in 2006 when it bought Conwood Sales Co. LP for $3.5 billion in cash.

Reynolds American has recently taken advice from Lazard bankers including Antonio Weiss, Maxence de Gennaro and Marc Weidner, who worked on the Lorillard transaction in conjunction with JPMorgan Chase & Co.

JUNE 26, 2016

Politics of Disparity vs. Politics of Prosperity

The referendum on the United Kingdom's membership in the European Union went from a footnote in modern politics to center stage on Friday. On Thursday June 23rd the U.S. markets gained, and some analysts predicted that the U.K. would remain in the European Union. However after-hours as the results continued to spell a narrow victory for those who wished to leave the E.U. the international markets fell.

Brexit begs the question, are the top levels of the E.U. focused on the actual best interests of each member state? If not, then it is imperative to work towards prioritizing that focus. Because time and again nations that siphon from constituents instead of providing strong foundations for constituents lose stability. Where the latter concept generally raises the standards of those who would, out of inexperience presume the former method is easier and selectively beneficial. When arguably the establishment of a strong foundation for all regions within a union increases quality of living above the capacity of the former practice.

U.S. Big Tobacco Owned By British Tobacco

One of the only industries to gain on the news of the British Exit, on Friday, was U.S. Big Tobacco. Reynolds (RAI) and Altria (MO) each gained around 1%, while international tobacco companies moved in line with the market. Reynolds is largely owned by British Tobacco (BTI) and a private holding company, Louisville Securities, based out of London, U.K.

I’m a big believer in dividend stocks. In fact, it’s rare that I buy a stock that doesn’t pay a dividend. Nothing does a better job of keeping management honest than the responsibility of paying shareholders a regular dividend.

But that said, no all dividend stocks are created equal. The “perfect” dividend stocks are ones that pay a competitive current yield but also have a good track record of raising the dividend every year. A high-yielding stock that doesn’t raise its dividend on a regular basis is essentially a risky bond with a payout that can be cut at management’s whim. Sure, you can fudge your numbers to make your earning per share number every quarter. But cold, hard cash doesn’t lie. You either have it to pay out … or you don’t.

You also need to see growing revenues and earnings. Without more money coming in, it’s hard for a company to send more in dividends out to shareholders.

And finally, we should always be a little wary of dividend stocks with extremely high yields. Once in a while, you can find a real gem with a fat yield due to a temporary mispricing. But more often than not, when you see an exceptionally high yield, the market is essentially telling you that the dividend is likely to get cut.

So with that said, let’s take a look at five dividend stocks you’re better off avoiding. All might be alluring temptresses, but they will potentially lead you on the path of income destruction.

Vale SA

I’ll start with Brazilian miner Vale SA (VALE). Vale today is one of the highest-yielding stocks you can find with a dividend yield of 8.3%. It’s also a stock whose dividend is almost certain to be cut. Although the board of directors still has to approve it,management proposed slashing the dividend by half in late September.

I have nothing against Vale … or against mining stocks in general. Under the right conditions, miners can be wildly profitable trades. But they are terrible dividend stocks.

Think about it. If you’re buying dividend stocks, chances are good that you’re doing so because you need current income. You certainly wouldn’t complain if you had capital gains. But capital gains are a secondary priority.

And if it’s income you need, stability is of the utmost importance. Your expenses rarely fall, so it’s critical that your income not fall either.

Well … Vale’s business is about as far from stable as you can get. Miners have absolutely no control over the prices they get for the metals they dig out of the ground. They are completely at the whim of the market. Yet they also have very high fixed costs and, often, a unionized workforce with an ax to grind.

Vale’s stock price is down about 70% from its highs of two years ago and down about 90% from its pre-2008-crisis highs. Could VALE rally from here? Sure, particularly if Brazil’s macro situation stabilizes.

But that makes it a potential trade — not a suitable dividend stock.

Reynolds American 

If you’ve read my work for any time, you might be a little surprised to see Reynolds American (RAI) on a list of stocks to avoid. For years, I was a major proponent of vice investing and particularly of tobacco stocks.

But my love affair with Big Tobacco was directly the result of it being perpetually underpriced. Because of the social stigma and regulatory risk, tobacco stocks were the eternal value stocks, high-yielding dividend dynamos that offered market beating returns.

Well, things have changed. Investors have become so starved for income, they’ve actually bid up the prices of tobacco stocks to a substantial premium over the broader market. Reynolds American currently trades for 19 times next year’s expected earnings. TheS&P 500 trades for closer to 16 times next year’s earnings.

Remember, tobacco is an industry in terminal decline. The number of Americans that smokes declinesevery single year. Teenagers today are more likely to have used illegal drugs in the past six months than to have smoked a cigarette. There is absolutely no justifiable reason for a Big Tobacco company to trade at a premium to the broader market.

Right now, Reynolds American sports a dividend yield of 3.2%. Sure, that’s higher than the market’s dividend yield of about 2%. But for crying out loud, shares of the resurgent Microsoft (MSFT) yield 3.3%, and which would you rather own?

Hey, there is a price at which any stock gets interesting. If Reynolds yielded a good 6%-7%, I’d be all over it. But a 3.2% yield is just not higher enough to justify buying Reynolds. This is a dividend stock best avoided.

International Business Machines

It takes a certain amount of chutzpah to put IBM (IBM) on a “stocks to avoid” list. It is, after all, one of the favorite stocks of the Sage of Omaha himself, Warren Buffett. And if Buffett likes it, it must be fantastic, right?

Wrong.

I have absolute and total respect for Mr. Buffett. He’s a better investor than I will ever be, and I am comfortable admitting that. But he is also human and very fallible. Berkshire Hathaway itself was a disastrous investment for Buffett. He admitted as much in an interview a few years ago in which he called Berkshire the single worst investment of his career. By Buffett’s own estimation, he’d be twice as rich as he is today had he never bought a single share of Berkshire Hathaway.

This brings us back to IBM. When Buffett first bought it, he was attracted to its long-term service model and its penchant for returning cash to investors via share buybacks.

But there are some big problems here. To start, IBM’s model is not as stable as it appeared a few years ago. Out of nowhere, Microsoft, Google and Amazon have turned IBM’s business upside down with cheaper and more flexible cloud options. And the billions spent on share repurchases may go down in history as one of the worst allocations of capital in history. IBM stock is down by a third from its 2013 highs, meaning that the roughly 169 million shares repurchased since 2012 were purchased at prices well above today’s. That’s total destruction of shareholder value.

Meanwhile, IBM’s sales continue to fall. Revenues are down 17% since the end of 2012.

At current prices, IBM sports a dividend yield of 3.6% Don’t fall for it. There are better opportunities out there.

Verizon 

I would also recommend you avoid Verizon (VZ). Yes, it has a fantastic current yield of 5.1%. But dividend growth has been almost nonexistent for years. Over the past five years, Verizon has managed dividend growth of only 2.9% per year.

Yes, that’s beating inflation. I’ll give them that. But it’s not beating it by much.

And I wouldn’t expect much more in the way of dividend growth going forward. Verizon already pays out about 92% of its profits in dividends. So for dividend growth to improve, profit growth needs to step it up a notch.

But just how likely is that? Verizon’s primary business lines — mobile telephony and paid TV — are both mature businesses with saturated markets. Not only does every American over the age of 5 already have a mobile phone, but most have already upgraded to smartphones with data plans. And cell service is quickly becoming commoditized as cheaper rivals like T-Mobile undercut the larger players on price.

And cable TV appears to be in the early stages of long-term decline or, at the very least, a major shakeup. Cable bills have outpaced inflation for years, prompting many Americans – and particularly young Americans – to “cut the cord” and eschew cable service for cheaper internet options.

Verizon isn’t going out of business anytime soon. But it’s a slow-growth dinosaur with businesses under constant attack from competitors. Verizon is best avoided.

Wynn Resorts 

And finally we get to hotel and casino operator Wynn Resorts (WYNN). It’s hard to think of too many sectors less suitable for a stable dividend portfolio than gaming. While many vice industries are recession resistant (people don’t stop drinking and smoking when the economy gets bad), gaming is highly dependent on tourism. And tourism, of course, is very economically sensitive. When the shekels are tight, you avoid taking that weekend trip to Las Vegas.

Wynn’s problems are compounded by the fact that it has major exposure to China’s gaming hub Macau. This would have been seen as a major strength just a few short years ago. But with the Chinese economy slowing and with the government cracking down on conspicuous consumption, exposure to Chinese gamblers is a major risk. 

Not surprisingly, Wynn’s stock price is down about 75% from its 2014 high. Wynn, perhaps not surprisingly, also had to cut its regular dividend recently, slashing it by two-thirds.

At current prices, the bad news from a slowing China might be fully priced in. But Wynn’s cash flows are still far too volatile for this stock to be a good dividend candidate.

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.

There is blood on the street today.  No getting around that.  As I write this there are only 12 names in the S&P 500 that are not down on the day.  Twelve for you English majors.  97.5% of the names in the index are down.  Days like this lead the debate towards a long term downtrend vs possible capitulation.  Volume does not side with the capitulation story though.

But for those of you looking longer term days like today are an opportunity see what names are shining.  And by shining I mean not down 3%.  One sector seems to stand out above the rest.  High Dividend Large Cap Consumer stocks.  This should not surprise.  they have been strong through the sell off.  Here are a few to note:

Campbell's Soup, $CPB

Less than less than 4% off its all time high made last week.

Clorox, $CLX

Has continued to rise since the August 24th pullback.

Reynolds American, $RAI

According to studies done by Investor Business Daily the majority of the “leading” stocks are usually in leading industries.  Their studies show that “37% of a stock’s price movement is directly tied to the performance of the industry group the stock is in. Another 12% is due to strength in its overall sector; Therefore, roughly half of a stock’s move is driven by the strength of it’s respective group”.One of the ways to take advantage of this is by focusing on the stocks that are in the top 20 best performing industries in the last quarter.  In green are the industries that are new to the top 20 this week.

There’s roughly 561 names within these 20 groups. To narrow down the list we only included stocks that have traded at least on average 100,000 shares daily for the last 20 days.  Then we narrowed down the list further by screening for stocks that are not extended in the short term, that took us down to 116 names. Out of those 116 names only 6 have a decent risk reward ratio for swing trades based on their chart pattern. Today the market will again narrow down the list further for me since I will only look to get involved in the names that trade above their previous day high.  Below are the names that I believe are set up technically (the way I view charts) for 1-20 day swing trades.

$RAI $PCLN $ISLE $PENN $JAH $FB 

Getting Started Is Easy

Bidness Etc looks at the current position of the tobacco industry and whether E-Cigarettes pose a threat or an opportunity for the global tobacco industry

First developed in China in 2003, e-cigarettes have been the hottest trend in the tobacco industry ever since. E-cigarettes sales have surged over the past few years bypassing the opinions of analysts who believed they could not significantly penetrate the conventional tobacco market. 

At first, the dominant force in the smokeless tobacco market was a group of small manufacturers selling their electronic nicotine delivery systems mainly through online stores. Around 300 companies in the United States alone, still sell their electronic smoking devices over the internet. 

To that extent, larger tobacco manufacturers were caught napping by the e-cigarettes wave. Now they are moving. Using their massive operational scales, tobacco giants are pushing to dominate the market for e-cigarettes with their own vaporizing products. 

Some analysts think the larger tobacco manufacturers are late to the party, as e-cigarettes become less fashionable and convenient than larger vaporizing products offered at a range of ‘vape shops’ around the country.

Has The E-Cigarettes Market Really Stalled?

Mainstream tobacco producers in America have recently experienced sluggish growth in the e-cigarettes business, raising legitimate questions for experts who have marked out ambitious growth trajectories for the market.

Greensboro-based tobacco producer, Lorillard Inc (LO) reported a third quarter, 40% slump year-over-year in revenues generated from vaporizers.

On the broader front, the company’s e-cigarette sales are sharply down on the second half of 2014, bumping along at a three year low in this year’s first quarter.

The company blames plummeting sales of its ‘Blu’ brand, coupled with increased competition, for its overall e-cigarettes sales slide.

In fact, Lorillard is expected to dump Blu this year, as part of a three-way agreement with the Federal Trade Commission (FTC) and the UK’s Imperial Tobacco Group PLC in order to win FTC approval for a merger with its larger rival Reynolds American, Inc. (RAI).

Similarly, Reynolds’ e-cigarettes brand Vuse has failed to capture a significant market share. The same fate is shared by ‘Markten’ - an e-cigarettes brand from industry leader Altria Group Inc. (MO).

The shift in consumer preferences from the smaller e-cigarettes to larger tank ‘vaping’ devices offered by hundreds of ‘vape shops’ in the country have dragged sales of e-cigarettes downward. These larger devices provide customers with improved battery timing, delivering a ‘puff’ more closely resembling a conventional cigarette. 

Some research has found consumption of e-cigarettes can actually be more harmful than conventional smoking. This would appear to undermine manufacturers claims of ‘health benefits’ for their products and lend fuel to critics claims of ‘pure marketing gimmicks’.

A recent study conducted by the University of California evaluated the risks of vaping. The research, presented to the 2015 American Thoracic Society International Conference, concluded that the chemicals used to flavor the electronic smoking devices can damage cells in lung tissues similar to that caused by combustible cigarettes. 

Another recent study, this time led by James Pankow – a chemistry and civil and environmental engineering professor at the State University of Oregon - claims the carcinogens contained in e-cigarettes are as much as 15 times more lethal than those found in traditional cigarettes. 

Still, some optimistic analysts and experts believe e-cigarettes are here to stay. In a joint report, analysts at investment firms UBS and Wells Fargo claimed the market for electronic smoking devices should continue to grow exponentially, building on the growth of recent years. 

The report projects a $10 billion hike by 2017 in the vaporizer market, up from last year’s $2.76 billion.

Research firm BIS supports this view. Its research suggests the e-cigarette market will grow to $39.6 billion through 2024, translating into 27.3% compound annual growth rate (CAGR).

The analysts claim e-cigarettes will continue to feed off a growing health consciousness in the country, as people dump conventional cigarettes for alternative vaporizing products; which many still believe are less unhealthy than conventional cigarettes. Wells Fargo says conventional cigarettes revenues for market leader Altria Group could be ripped in half as early as 2023.

Tobacco Manufacturers Hopeful of a Bright Future in E-cigarette Space

Despite current headwinds, major tobacco producers are willing to take on smaller vape shops and independent online e-cigarette sellers in the hope of a market revival.

London, UK, based British American Tobacco (BAT) was the first major tobacco producer to hit the e-cigarettes market when in August 2013, the company introduced ‘Vype’. Other larger mainstream tobacco producers quickly followed.

Philip Morris International Inc (PM) teamed up with its peer Altria Group to debut e-cigarette products and introduced other ‘reduced risk’ tobacco products. In mid-2014, as Lorillard posted a slumping quarterly top line amid poor e-cigarette sales, Phillip Morris announced its acquisition of ‘Nicocigs’ – a UK e-cigarette startup – to break into the UK’s relatively more promising vaporizers’ market.

Altria Group itself is aiming to move deeper into the market its ‘Markten’ brand. Imperial Tobacco’s e-cigarette, dubbed ‘Puritane’, also launched last year. 

Way Forward

Despite some analysts’ claims of encouraging future growth potential in the e-cigarettes business, at BidnessEtc we believe shifting consumer trends and increased competition from vape shops as well as from mainstream tobacco producers will likely cap top and bottom line prospects in e-cigarettes.

What is the worst combination for a consumer company you could have put together a year ago?

How about...

(1) exclusively international earnings - including a strong focus on the emerging markets - at a time of rampant dollar strength;

(2) a particular cost focus in Switzerland - which for a time was seemingly the only country interested in having a currency that could look the dollar in the face;

(3) having to announce an end to your popular buyback policy as fears grew that your generous dividend payment was progressively coming under more threat.  

The company that ticked all these boxes the best was Philip Morris International the company responsible for selling Marlboro and other tobacco brands outside of the US.  And did the stock lag on FX related downgrades...

....until at least today.  

The company’s update today still talked about the impact of foreign currencies and impacted revenues and profits but now that impact is no longer more than offsetting the underlying continued good trading - and especially pricing performance - of the business worldwide.  

Now cigarettes and other tobacco products are not everyone’s favourite investment.  I understand that.  Strictly as a financial investment the continued strong pricing power Philip Morris International has long exhibited shone through even in economically troubled countries like Russia. 

And then there were the market share gains - apparent in all geographies that the company was active in.  That’s impressive. 

Source: Philip Morris Intl

The buyback may not yet be back but pre-results the share was still yielding 5%.  Today’s share price romp will have pushed that back to the high 4%s but almost all investors can make that work for them. 

Of course challenges lay ahead but start to unwind the fears noted earlier and a return to a $90+ share price awaits.  

Not a smoking hot return maybe but that’s not the role of a tobacco stock in a portfolio.  To mix my consumer sector metaphors, now that the glass is half full again a re-rating awaits.  You may not be a user of the product but I believe you will be rewarded over the next year from holding the shares - even after the bump up today.