Andrew Goodman, Contributor – Forbes Investing
12/05/2013 @ 11:59AM |1,924 views
When 57-year-old Tom Holloway turned on his e-cigarette, he got a lot more than nicotine. The device exploded in his mouth, knocking out two teeth and leaving him with severe burns. ”The best analogy is like it was trying to hold a bottle rocket in your mouth when it went off,” said Joseph Parker, division chief for the North Bay Fire Department in a CBS CBS +1.25% news report.
If e-cigarette companies can correct these problems and investors can get past these isolated incidents, they will find that sales of e-cigarettes are also exploding. Euromonitor forecasts the retail sales value of e-cigarettes worldwide for 2013 at $2.5 billion. Wells Fargo WFC +1.13% estimates that figure will top $10 billion by 2017 and Bloomberg Industries projects that sales will exceed those of traditional cigarettes by 2047.
The popularity of these new devices can be attributed to a younger generation. According to a recent Centers for Disease Control report, schools across the country are reporting an increase in e-cigarette usage, and school administrators are struggling to create policies that curb their usage or outright ban them. With a lack of regulation on sales or advertising, e-cigarettes have been marketed as a safer alternative to tobacco products and come in flavors such as chocolate, caramel, and strawberry.
In an effort to standardize safety, it is likely that stricter regulation of e-cigarettes is coming. A crackdown will force many e-cigarette companies out of business as they lack the resources to abide by new rules, leaving the market to the big tobacco. As a result, the following companies have the cash flow to drive e-cigarette volume and revenue growth.
With the acquisition of Blu eCigs in 2012 Lorillard LO +0.59% (LO) became the first big tobacco company to enter the e-cigarette market. Recently the company also acquired SKYCIG, a premium brand of e-cigarettes based in the UK. This gives Lorillard a global presence and a leading 49% market share in the e-cigarette market. The stock currently has a dividend yield of 4.2% and this year the company announced a $1 billion stock repurchase plan.
Phillip Morris International (PM) had taken a wait and see attitude on e-cigarettes, but on November 20th management proclaimed it “the single greatest opportunity for us” and announced its intention to enter the e-cigarette market during the second half of 2014. The company has increased its dividend 104% and repurchased 25% of its outstanding shares since its spinoff from Altria in 2008. Phillip Morris will continue to be aggressive in its return of capital to shareholders in 2014, committing approximately $6 billion to share repurchases and another $6 billion to dividend payments. The stock has a dividend yield of 4.3%.
British American Tobacco (BTI) trades as American Depository Receipts (ADR’s) on the NYSE. BTI launched its Vype e-cigarette in the UK. It’s currently available online and is expanding to retail outlets. The company will repurchase £1.5 billion of its own shares in 2013. BTI also owns a 42% stake in Reynolds American (RAI) that is valued at $11.5 billion. Reynolds launched its VUSE e-cigarette in Colorado over the summer and is expanding across the United States. BTI has a dividend yield of 2.7%.
Altria (MO) launched its MarkTen e-cigarette in Indiana in August and plans to expand distribution to Arizona in December. Altria plans to retire 100 million shares by 2017 and announced a 9% dividend increase this year (5.2% yield).
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