According to recent reports, tobacco giants Reynolds American (RAI) and Lorillard (LO) continue to work to tie the knot. The speculated deal is rumored to be a three-way transaction that involves Reynolds’ shareholder British American Tobacco (BTI), but the timing of any deal is uncertain, and any specific pricing information has been limited. Usually, consolidation results in an industry with significantly more pricing power, but the tobacco makers already have substantial strength in this department. We would therefore expect the transaction, if consummated, to result more in cost savings than in revenue enhancements. We’d also expect the deal, if completed, to result in some divestitures to please regulators, and we think this could pave the way for either Philip Morris (PM), Vector Group (VGR), or even Altria (MO) to pick up assets on the cheap. We’re very much in favor of the transaction, though until we have more concrete information, we’re maintaining our fair value estimates for constituents across the tobacco industry.
In other news, SABMiller, which is 27%-owned by Altria, reported better-than-expected fiscal 2014 results, released May 22. The global brewer reported that lager volumes were up 1% on both a reported and organic basis thanks to expansion in Latin America, Africa and the Asia Pacific. Constant-currency group net producer revenue advanced 3% from last year. We were very pleased with the pace of organic, constant-currency EBITA (earnings before interest taxes and amortization) growth, which came in at 7% for the year. SABMiller leveraged the strong lager volume increases into 90 basis points of core EBITA margin expansion. The company launched a new program to keep profits moving in the right direction, and SABMiller expects to deliver $500 million in annual operating efficiencies by the fiscal year ending March 2018. We liked the news, and Altria continues to benefit from this hidden asset’s strong equity performance. Altria is a best idea* in both the Best Ideas portfolio and Dividend Growth portfolio.
* A best idea in Valuentum parlance is a holding in the Best Ideas portfolio and/or the Dividend Growth portfolio. We typically add shares to the Best Ideas portfolio when they register a high rating (a 9 or 10 = a “we’d consider buying” rating) on the Valuentum Buying Index and hold them until they register a low rating (a 1 or 2 = a “we’d consider selling” rating) on the Valuentum Buying Index. We don’t add all firms that register a high score on the Valuentum Buying Index to the actively-managed portfolios due to sector weighting or overall market valuation considerations, among others. The Valuentum Dividend Cushion is a key factor behind adding companies to the Dividend Growth portfolio and is used in conjunction with a company’s annual dividend yield, its price-to-fair value ratio and Valuentum Buying Index rating.