Deals, Dividends And Growth Set Tobacco Stocks Alight

Source from:  theglobeandmail.com KEITH DAMSELL 04/16/2007

Producers flirting with record highs for share prices University students may be butting out but tobacco stocks have been an investor's best friend. Despite ethical and legal concerns, the shares of many big tobacco producers have been smoking lately thanks to healthy dividends, growth in international markets and a wave of deal making. "You could not find a better legitimate business in the world than the tobacco business, bottom line. Look at the performance of tobacco stocks. It has totally turned and in the long run is very, very hard to beat," said Norman Levine, managing director of Portfolio Management Corp. The Toronto money manager does not currently hold any tobacco stocks. Bowing to pressure from student activists, the University of Toronto plans to divest the bulk of its tobacco holdings. The university's $2.5-billion equity investment arm will sell companies that derive 10 per cent of more of their revenue from tobacco products, along with tobacco stocks that make up 10 per cent or more of pooled funds. As of Dec. 31, 2005, the school's investment arm held about $10.5-million of tobacco industry stock, investments that included $4.6-million in Japan Tobacco Inc., $4.5-million in Altria Group Inc., and $1.4-million in Rothmans Inc. The Rothmans stock will not be divested because it comprises less than 10 per cent of a pool. U of T is the 24th postsecondary institution in North America to divest stocks in the tobacco industry. Ethics aside, it's a good time to hit the "sell" button as many tobacco shares hover near record highs. On the Nikkei Stock Exchange, Japan Tobacco is trading near a December record of ¥597,000, ($5,754 Canadian), closing unchanged yesterday at ¥583,000. The company is acquiring Gallaher Ltd. of Britain for $18.8-billion (U.S.). Japan Tobacco, owned 50 per cent by the Japanese government, has been aggressively expanding overseas as demand declines at home. The company dramatically ramped up production in Russia last year and has a major presence in Ukraine, Iran, Turkey and Malaysia. "Overseas tobacco operations have continued to perform favourably," Mitsubishi UFJ Securities Co. Ltd. of Tokyo said in a recent report. Share price "appreciation has been underpinned by steady growth in the global tobacco business." Meanwhile, the shares of New York-based Altria hit a high of $70.75 on April 5 on news the producer of Marlboro cigarettes will spin off its Kraft Foods division. The stock is a Wall Street favourite with 13 of 16 equity analysts maintaining "buy" ratings. "We recommend investors continue to add new money to this name," said analyst Bonnie Herzog of Citigroup Global Markets Inc. in an April 2 research note. "We expect all tobacco multiples will continue to expand due to the reduced litigation environment." More deal making is expected. Spain's Altadis SA yesterday rejected an improved $16.2-billion offer from Britain's Imperial Tobacco Group PLC as too low. Analysts said Altadis' rejection was unlikely to be the end of it, with some expecting a higher offer to come. "The endgame starts once Imperial decides the friendly approach is not working and goes hostile -- something we continue to think it is prepared to do," Dresdner Kleinwort analyst Matthew Jordan told the Associated Press. Ironically, the sole tobacco stock U of T will continue to hold is Rothmans, the weakest performer of the group. Enditem