What Should Investors Think of Big Tobacco’s Big Deals?

A flurry of M&A activity has hit the tobacco industry. This is not entirely a surprise, because industries that see a slowdown typically turn to mergers and acquisitions to reignite growth.
But now Big Tobacco players like Reynolds American (NYSE: RAI) and Altria Group (NYSE: MO) are getting into the mix in a major way.

Consolidation in Big Tobacco

In the past year, tobacco companies have come through with a number of high-profile deals. Last year, investors may recall that Reynolds American bought rival Lorillard for $25 billion. That brought together America’s No. 2 and No. 3 tobacco companies in an attempt to take down larger rival Altria.
Reynolds American has undergone a significant reshuffling of its portfolio. In order to appease regulators’ antitrust concerns, Reynolds American agreed to jettison several brands – including Kool, Salem, Winston and the popular Blu e-cigarette line – so that the deal would go through.
But Reynolds American didn’t stop there. Recently, the company announced it will sell international rights to its Natural American Spirit brand to Japan Tobacco in an all-cash transaction valued at approximately $5 billion. Reynolds American will also sell the brand name, trademarks and international companies that distribute and market the brand outside the United States.

Altria’s Turn

Now the focus is on Altria to do something big. While Altria has so far resisted the temptation to make a major splash in the M&A pool, it is in position to capitalize on merger activity. That opportunity comes in the form of Altria’s approximately 27% stake in beer giant SABMiller PLC (OTC: SBMRY). SABMiller is in talks to be acquired by larger beer behemoth Anheuser-Busch InBev (NYSE: BUD).
Beer, like cigarettes, is an industry struggling for growth. As smaller craft brews become increasingly popular in the United States, consumers are losing their desire for mega-brews like AB-InBev’s flagship Budweiser and Bud Light. That means M&A is one of the best opportunities available to generate growth.
Altria stands to benefit hugely from a SABMiller buyout. SABMiller’s market capitalization is currently $90 billion, which gives Altria’s investment a market value of roughly $24 billion.
And it’s likely that figure will go up from here, as SABMiller has rejected AB InBev’s most recent $104 billion offer on the grounds it undervalues the company. Altria has indicated that it’s on board with a takeover, and it’s not hard to see why.

Implications for Investors

The rationale for Reynolds American and Altria raising billions of dollars off their respective deals could possibly be to return more cash to shareholders. Tobacco companies have long been relied upon for their high dividend yields. By selling assets and raising cash, they can return this excess cash to shareholders through dividend increases over the next several years.
Indeed, Altria is one of the most legendary dividend stocks of all time. It has increased its dividend 49 times in the past 46 years, including an impressive 9% raise in September. For its part, Reynolds American raised its dividend by 7% this year.
If their various asset sales go through, Reynolds American and Altria will have billions of dollars in their pocket which they can use to buy back shares or increase dividends. That should be music to investors’ ears.
And if “sin stocks” like Altria and Reynolds aren’t your style, the editors at High Yield Wealth have assembled a wide array of reliable stocks with healthy dividends. Just click here for more details.
DISCLOSURE: Bob Ciura personally owns shares of Altria Group (NYSE: MO).