Altria Group Inc (MO), Lorillard Inc. (LO), Reynolds American, Inc. (RAI): Can e-cigs Save Big Tobacco?

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Reynolds American, Inc. (NYSE:RAI) has very high hopes for its Vuse brand. The brand currently only accounts for 2% of Reynolds’ total revenue, but it accounts for 50% of the company’s revenue growth. Reynolds expects the e-cig market to reach $3 billion in the next 5 years, less than what Wells Fargo is predicting, but still high triple digit growth. The really exciting thing for the tobacco industry is that e-cigs could offer more than just revenue growth–they could also offer margin expansion, according to Reynolds.

Final Thoughts

While cigarette makers are still going to find it hard to keep raising prices to keep up with declining volumes, especially when you factor in increasing state and federal sin taxes, electronic cigarettes may be able to help.

Lorillard Inc. (NYSE:LO) by far is the biggest beneficiary of the e-cig “revolution” and could actually generate enough revenue from e-cigs to soften part or all of the decline of traditional cigarettes. This depends on whether or not Reynolds American, Inc. (NYSE:RAI)’ or Wells Fargo’s predictions turn out to be true. With teenage use of e-cigs doubling in one year, there might be some logic to those bullish estimates.

Altria Group Inc (NYSE:MO) and Reynolds American, Inc. (NYSE:RAI) are both far behind in terms of market share and distribution, because Blu Ecigs are already sold in 80,000 stores throughout the nation. If these companies want to have a chance of still being able to pay out large dividends, they will need to enter this market quickly. If they don’t, then these companies’ large dividends will be at risk, because you can’t keep increasing payout ratios in a perpetually-declining market.

Even if these companies do enter this market, their revenue from traditional cigarettes is too large to be easily offset by e-cigs, so they better hope that the e-cig market becomes huge.

The article Can e-cigs Save Big Tobacco? originally appeared on Fool.com.

Callum Turcan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 

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