Imperial's Stock Could Be Habit-Forming

Consumer-staples stocks have become the latest addiction on Wall Street. But when it comes to some tobacco stocks, investors have resisted the urge. They should give in to temptation.

Consider shares of Procter & Gamble PG -1.18% and Clorox, CLX -0.90% which have both rallied in recent months as risk-averse investors chased after yield and steady, if only modest, profit growth. Both sport dividend yields of about 3%, and analysts expect earnings to expand by midsingle-digit percentages this year. The stocks both trade at about 19 times forward earnings, the highest level in several years. By some measures, Imperial Tobacco Group IMT.LN +0.94% looks a lot like P&G or Clorox. Imperial, which manufactures cigarette brands like Davidoff and Gauloises, has managed to increase profit by raising prices to offset a long-standing decline in smoking in developed markets. The stock offers a healthy dividend yield of almost 5%, and analysts expect earnings per share to increase 4.5% in the year through September. And yet, Imperial trades at just 11 times 2013 earnings. The problem? Investors are still skittish about Europe, which accounts for roughly 60% of the company's operating income.

A persistent problem in Europe is the unemployment rate, which is in the double digits across the region and has crept above 25% in Spain. At the same time, several governments have raised taxes on cigarettes in order to reduce fiscal strains brought on by the financial crisis. Those factors have added to the pressure pushing down on cigarette sales. While Imperial can try raising prices, this has become harder due to surging sales of illegal cigarettes. These can sell for a fraction of normal prices because they don't include taxes. According to a study by KPMG, counterfeit and contraband sales accounted for 11.1% of European cigarette consumption last year, up from 8.3% in 2006.

The question for investors is whether the illegal-cigarette problem will get worse. As the forgone tax revenue mounts, some governments should take notice, especially in countries such as the U.K. that tax cigarettes heavily. Legal cigarette consumption there dropped by 3.2 billion sticks last year, while illegal sales rose by roughly the same amount, KPMG estimates. Matthew Grainger of Morgan Stanley MS -0.48% says there are a limited number of entry points for cigarette trafficking into Western Europe. That suggests that even a small step up in enforcement efforts could go a long way.

Even if it takes time for Imperial's European woes to ease, it is hard to imagine the stock sinking much further. One reason: Other cigarette companies that also face volume declines may become intrigued by Imperial's low valuation. Combining Imperial with another tobacco conglomerate could lead to ample cost savings in markets where they have overlapping production and distribution. While there might be antitrust issues in some regions, there may be ways to divide the company. As Martin Deboo of Investec points out, Diageo DGE.LN -0.86% andPernod Ricard RI.FR -0.59% overcame a similar obstacle by dividing up several Seagram brands in the early part of the last decade. It is true that tobacco stocks tend to trade at a discount to other consumer staples, given the risk of regulatory changes affecting marketing and advertising. But Imperial rival British American Tobacco, BATS.LN -0.68% which generates roughly 30% of operating income in Europe, trades north of 16 times 2013 earnings a 52% premium. Investors who left Imperial on the shelf may soon find their cravings return.

Source: By JOHN JANNARONE http://online.wsj.com/article/SB10001424127887323398204578489321623762266.html

Costly tobacco: Smoking at home reduces property values says Ontario survey

A recent survey of Ontario real estate agents in Ontario found that smoking in a home could lower the value of your property by up to 30 per cent. The survey was sponsored by Pfizer Canada and besides the obvious damage by staining walls and carpets, it can leave a smell that is very hard to eliminate. I remember having a client close a deal and noticed a smell of smoke when they entered the home on closing. I asked why they didn't notice the smell when they originally toured the home and they said fans were on with electric air fresheners plugged into the walls. That apparently masked the smell that day. It makes sense that a home with a smoky smell or strong odor will be harder to sell as it will deter most buyers. Landlords are permitted to include no smoking clauses in their leases. But they can only evict a tenant who smokes if they can prove the smoking has damaged the unit or is bothering the other tenants. Here’s a case in point. In December, 2006 John Davidson rented a furnished condominium on Scollard St., in Toronto where the lease contained a no-smoking clause. The owner, Chris Cebula, noticed the smell of smoke in the apartment almost immediately, but Davidson refused to stop smoking. The landlord put the condo unit up for sale but his agent said the smell of smoke was hurting his ability to sell it. The landlord submitted estimates to the board to eradicate the smell of smoke from the apartment. Including staining and painting all the walls, replacing and/or upholstering the furniture, box spring and mattress, linens, drapes and carpets the cost amounted to $8,900. The landlord also claimed an extra one month’s damage of $2,052, since it would take one month to do the renovations. In a decision dated February 25, 2008, Landlord and Tenant Board adjudicator Egya Sangmuah found that Davidson’s smoking did damage the unit and awarded full damages to Cebula. The Non-Smoker’s Rights Association published their own study demonstrating that the average costs for a landlord to clean an apartment is two to three times greater when it was occupied by a heavy smoker. They also quote statistics from Canadian Fire Marshals demonstrating that cigarettes, lighters and matches remain one of the top causes of residential fires. Similar statistics are found with resale cars where the prior owner was a heavy smoker and it is difficult to remove the smell from the upholstery. Smoke or pet odours, such as cat urine, can cause headaches when trying to sell a home. There are solutions and companies that can solve these issues. Restoration companies such as Winmar Disaster Restoration, Medallion Healthy Homes of Canada and Biosense Environmental offer solutions that can assist with these problems. The process involved is using concentrated ozone gas to get into all areas of the home, including the walls, to assist in cleaning out the smell, even when the home was occupied previously by heavy smokers. There are, of course, household products such as vinegar that you can use for minor problem odours or an over-the-counter product such as Nature’s Miracle, to remove pet odours. Buyers, be suspicious if you notice the fans going or electric air fresheners whenever visiting a home for the first time. Sellers, don’t try to cover up or hide odour issues that you know about. Get rid of any foul odour before putting your home for sale, to maximize your return. Source: http://www.thestar.com/business/personal_finance/2013/05/19/costly_tobaccosmoking_reduce_property_values_says_ontario_survey.html

Ban tobacco in Maine entirely, or not at all

A bill to “simply outlaw tobacco altogether” would make more sense than piecemeal bans on smoking, Gov. Paul LePage said Monday as he vetoed a bill to outlaw smoking on public college campuses. “I firmly believe Maine people are responsible enough to make their own decisions concerning tobacco,” LePage wrote in his veto letter. “However, for those who oppose its use, they should bring a bill forward to simply outlaw tobacco altogether.” “Our various public colleges and universities can make their own decisions on whether or not to permit smoking on their campuses,” the governor wrote. And many already have. Five of the seven University of Maine System campuses are currently smoke-free, and smoke-free policies will take effect at the remaining two, the University of Maine at Machias and the University of Southern Maine, on Sept. 1 of this year and Jan. 1, 2014, respectively. In the Maine Community College System, one campus is currently smoke-free: Kennebec Valley Community College in Fairfield. A second campus, Eastern Maine Community College in Bangor, will be smoke-free starting Jan. 1, 2014. The bill, LD 468, sponsored by independent Rep. Ben Chipman of Portland, passed the House and Senate without dissent earlier this month. The bill would have prohibited smoking, except for religious purposes, on all university and community college campuses and at Maine Maritime Academy starting Aug. 1, 2014. Chipman said by phone Monday that his intent was to establish a uniform smoking policy for all Maine state campuses. He said he encountered very little opposition to the bill, which passed without debate or roll-call votes in the House and Senate. The Legislature’s Health and Human Services Committee voted 10-3 in favor of Chipman’s bill. “Now along comes the governor and he decides he wants to be the voice of smokers,” Chipman said. “I’ll reach out to his office and talk to him. I’m hoping the House and Senate can stand by the decision we made with almost no opposition to protect the health of people who should be able to live, learn and work without having to breathe secondhand smoke.” Last week, LePage issued a statement expressing his opposition to raising state tobacco taxes. The Legislature’s Taxation Committee last week voted unanimously to recommend against a bill that proposed raising the state tax on cigarettes from $2 to $3.50 per pack and against a separate bill that would have taxed other tobacco products, including cigars and chewing tobacco, at an equivalent rate to cigarettes. LePage also vetoed on Monday a bill that would order a state study related to providing rental subsidies to MaineCare recipients with intellectual disabilities. In his veto letter, LePage said it’s premature to conduct the study when DHHS is in the midst of consolidating and overhauling services for people with intellectual disabilities. He also objected to the fact that the study would increase the workload at DHHS. Noting that the bill originally would have required DHHS to allocate $200,000 for the study, LePage wrote, “Redrafting bills to reduce the workload and claim that it will be provided ‘within available resources’ does not change the fact that additional work requires additional resources. We can no longer simply pile more initiative up without recognizing they have costs.” Democrat Rep. Richard Farnsworth of Portland, LD 387’s sponsor, said the study would have provided information the state does not now possess. “Maine’s contribution to their room and board is shrinking while costs for their providers are rising.” he said. “Without examining this situation, we have no way of knowing whether these Mainers are getting the care they need and deserve or whether the state is using its dollars wisely.” Monday’s vetoes mark the seventh and eighth of this legislative session. The Legislature has sustained five of LePage’s vetoes, with consideration of an override of a sixth veto issued Friday likely to start in the House this week. It takes two-thirds majority votes in both the House and Senate to override a veto. Source:http://bangordailynews.com/2013/05/20/news/state/lepage-veto-ban-tobacco-in-maine-entirely-or-not-at-all/

Lázár accuses Philip Morris of creating anti-Fidesz scandal

Hungary’s national tobacco company has refused a Socialist lawmaker access to documents containing bids submitted for a recent tender. The company on Wednesday rejected Csaba Toth’s request to view the bids for tobacco concessions, arguing that even though the company is publicly owned, it is not a state agency and so does not have to disclose public information. Toth said he would appeal to the National Development Ministry. Parties of the opposition have sharply criticized the government for the tobacco tender, claiming that members of the ruling Fidesz party influenced the tender process. Legislation approved last September established a state monopoly on the retail sale of tobacco products from July 1, 2013. Meanwhile, Janos Lazar, head of the Prime Minister’s Office, said the recent scandal surrounding the national tender for tobacco concessions may have been fuelled by tobacco giant Philip Morris, a senior government official has said. Philip Morris’s interests were harmed by the revamp of tobacco trade in the country, Lazar said in an interview to the weekly Heti Valasz. The company first lobbied the European Commission before making an attempt to stop Hungarian legislation from changing rules on public information, and launched a political campaign to blacken the government, Lazar said in the interview, an excerpt of which the paper released to MTI on Wednesday. “They sent us a clear message that they would do everything in their capacity to prevent the new system from being introduced. With such a large market, spending a few hundred million forints on a PR campaign is no problem,” he said. Referring to allegations that concession winners had been selected according to instructions from the ruling Fidesz, Lazar insisted that 90 percent of the winners were not associated with the party. Heti Valasz will publish the full interview on Thursday. Source: http://www.politics.hu/20130509/socialist-mp-refused-access-to-tobacco-documents-lazar-accuses-phillip-morris-of-creating-anti-fidesz-scandal/