Skip to main content
A scary good deal on trusted journalism
Get full digital access to globeandmail.com
$0.99
per week for 24 weeks SAVE OVER $140
OFFER ENDS OCTOBER 31
A scary good deal on trusted journalism
$0.99
per week
for 24 weeks
SAVE OVER $140
OFFER ENDS OCTOBER 31
// //

What are we looking for?

Reports surfaced this week that the U.S. Federal Trade Commission is set to approve the $27-billion (U.S.) merger between cigarette manufacturers Reynolds American Inc. and Lorillard.

In the past, not owning tobacco stocks has been hazardous to your portfolio as the five tobacco companies that are included in the S&P 1500 are up about 189 per cent over the past decade, easily blowing away the S&P 500's approximately 76-per-cent gain.

The industry has long been a no-go zone for socially responsible investment funds and many retail investors – but for others, my colleague Rob Belanger and I thought we would have a look at tobacco stocks this week.

The screen

We started with global tobacco companies larger than $1-billion in market capitalization and sorted them from the largest to the smallest.

The EV/EBITDA (enterprise value divided by earnings before interest, taxes, depreciation and amortization) is one of the most commonly used valuation metrics. We are looking for a low number.

Price-to-sales is a valuation ratio that compares the company's stock price to its revenues. A low ratio may indicate the stock is undervalued.

The P/FCF ratio (price to free cash flow) is also a valuation metric – this one comparing the market price with the annual free cash flow. It represents the amount an investor is willing to pay for a dollar generated from a company's operations. A low number is preferred.

Sales growth during the past 12 months had to be positive.

Net profit margin measures how much the company actually keeps out of every dollar of sales, and only companies with profit margins over 10 per cent are shown.

The net debt/EBITDA is a measurement of leverage that shows how many years it would take a company to pay back its debt if its net debt and EBITDA are held constant. Only companies showing net debt/EBITDA of less than two times are shown. The ratio can be negative if the company has more cash than debt.

What did we find?

Only three companies outperformed the averages in five of the six categories. Eastern Tobacco is an Egyptian company producing cigarettes from imported tobacco. KT&G Corp., formerly known as Korea Tobacco and Ginseng, enjoys 70 per cent market share in South Korea and 20 per cent of sales are to foreign countries. Japan Tobacco Inc., based in Geneva, was formed in 1999 with the purchase of the non-U.S. assets of R.J. Reynolds.

Please consult an investment professional or conduct further research before buying any of the companies listed here.

Michael Bowman is a portfolio manager at Hamilton-based Wickham Investment Counsel Inc., an adviser to high-net-worth clients.

Global tobacco companies

Report an error Editorial code of conduct
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

If you do not see your comment posted immediately, it is being reviewed by the moderation team and may appear shortly, generally within an hour.

We aim to have all comments reviewed in a timely manner.

Comments that violate our community guidelines will not be posted.

UPDATED: Read our community guidelines here

Discussion loading ...

Latest Videos

To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies