The Food and Drug Administration is considering the health impact of dissolvable tobacco, leaving investors concerned that new regulations may hurt Reynolds American. Shares in the tobacco giant dropped nearly 2.5% in trading on Thursday.
With experts urging regulators to consider the candy-like appeal of flavored dissolvable tobacco to children, there may be good reason to worry. Dissolvable tobacco differs from ordinary chewing tobacco in that it dissolves in the mouth.
Reynolds has invested heavily in soluble tobacco products such as Camel Orbs, cigarette-store.biz/online/camel and Camel Strips sticks, as consumer demand for smokeless tobacco growing. Camel soluble brands are sold as “a convenient alternative to cigarettes and tobacco moist for adult consumers of tobacco products.”
Previously, Reynolds was able to capture 70% market share with its Camel snus product, and he hopes to repeat that success. Snus is a moist powder tobacco product contained in a pouch that users place under their lips. FDA control could jeopardize those plans and left Reynolds in search of other engines for income.
Reynolds American is highly dependent on innovation, as cigarette smoking continues to fall, and smoking in public places is becoming less tolerant. In fact, Reynolds sees its smokeless tobacco products as “more in line with public expectations with respect to tobacco products in use today,” according to the 2010 statement. Nevertheless, concerns about the health risks of smokeless tobacco and fear that products such as mint and cinnamon balls Camel appeal to children can make new products less socially acceptable.
Despite the drop in cigarette consumption in the United States, Reynolds remains popular among investors due to strong global presence and consistent dividend growth even during the sub prime mortgage crisis in 2008, when stocks fell to nearly $ 18 per share. Reynolds, an increase in dividends in the last quarter by 5.7% largely due to increased operating profit by 2.6% compared with the previous year.
The company also saw its operating margin to grow steadily due to rising prices and greater productivity that offset declining cigarette sales. There is a great opportunity to raise prices, if necessary, as a pack of cigarettes in the Reynolds averaged less than offerings from rivals Lorillard and Altria.
Despite lower prices, the company was unable to increase its share of the cigarette market. On the other hand, its smokeless products account for 31.4% of the market sector and the company offers more growth opportunities than cigarettes. Smokeless is not kept in net sales to dip slightly, compared with $ 6.1 billion to $ 6 billion for the first three quarters of 2011.
With greater reliance on smokeless alternatives, more FDA regulation of these new tobacco products could hit Reynolds, where they are most vulnerable.
Another key risk for the company is the price of goods that can continue to grow in 2012. Higher costs of tobacco and the paper would reduce the company’s operating margin, which has remained almost flat in the third quarter of 2011 to 31.2%, up 1.4 percentage points from the previous year.
Tobacco companies can not ignore the headache of growth of state and federal excise taxes, which remain a serious concern as cash-strapped states looking for revenue sources without raising taxes. Sin taxes on tobacco products remain popular in many parts of the United States for the same reason that the smokeless tobacco market is growing: smoking less in line with public expectations than ever before.