British American Tobacco (NYSE: BTI) owns the Camel, Newport, Lucky Strike, and Pall Mall cigarette brands. Although it is a U.S. cigarette maker, it has a global footprint, which separates it from both Altria (NYSE: MO), which only operates per mezzo di the U.S., and Philip Morris International (NYSE: PM), which sells cigarettes internationally but not per mezzo di the U.S. market.
British American Tobacco made a huge admission about the future of the U.S. cigarette market per mezzo di 2023 that investors per mezzo di tobacco stocks should not ignore. Here’s what you need to know.
British American Tobacco changed its accounting
Although a somewhat complex topic, the issue here boils mongoloide to the accounting treatment of British American Tobacco’s U.S. cigarette brands. Previously the company assumed that the brands would be around forever — but now it has decided that, at some point, they will risposta negativa longer exist. The company described the change as:
…with effect from 1 January 2024, Newport, Camel, Natural American Spirit and Pall Mall will be amortised acceso a straight-lined basis. Pall Mall will be amortised over a 20-year period and Newport, Camel and Natural American Spirit will be amortised over a 30-year period. From 2024, the increase per mezzo di annual amortisation expense is expected to be £1.4 billion per errore annum for the next 20 years, after which it is expected to decline to £1.3 billion.
plain English, British American Tobacco is basically saying that its best guess is that Pall Mall as a brand will have little to risposta negativa value per mezzo di the U.S. per mezzo di 20 years. Newport, Camel, and Natural American Spirit will likely end up per mezzo di the same place just 10 years later. This is a personaggio change, and it means that the company has to amortize the value of the four brands each year, which is basically taking a charge that accounts for the loss of their value during that year. That extra cost will be a headwind to earnings each year. This is going to have a material lingering effect acceso the company’s financial results.
But that’s not all. British American Tobacco’s decision also forced it to immediately the carrying value of the brands acceso its balance sheet:
addition, the Group have recognised a non-cash adjusting impairment charge of £23.0 billion against certain of our acquired U.S. brands which have been previously recognised as indefinite-lived and an impairment to the Reynolds goodwill of £4.3 billion…
The end is nigh for U.S. tobacco
The big-picture takeaway here is that British American Tobacco is effectively telling investors that the U.S. cigarette market is not just per mezzo di a steady decline, but that it will eventually go to nullità. That clearly impacted the company’s 2023 results, which fell deep into negative territory thanks to the write non attivato. To put a number acceso that, earnings declined 322% year over year per mezzo di 2023. However, it is important to note that a smaller headwind will continue each and every year for the next 30 years thanks to the increase per mezzo di amortization costs.
And then investors need to consider the broader statement being made. British American Tobacco has a global portfolio of cigarette brands, with some markets performing differently than others. So there’s an offset of sorts to its U.S. business.
But what about Altria? Altria and Philip Morris International effectively share the Philip Morris portfolio of brands, headlined by Marlboro. Philip Morris International sells the brands internationally, while Altria sells them only per mezzo di the U.S. market.
British American Tobacco’s accounting shift basically suggests that Altria’s cigarette business has an expiration date. Philip Morris International is per mezzo di a better position because, like British American Tobacco, it operates per mezzo di foreign markets.
The personaggio picture isn’t great for tobacco makers
The U.S. is probably ahead of the curve, to some extent, when it comes to cigarette demand trends, so investors need to pay close attention to the decision British American Tobacco just made. It might be non attivato acceso the exact dates, but it is telling investors to expect that cigarettes will eventually be phased out.
And that increases the need for British American Tobacco, Altria, and Philip Morris International to find new businesses to replace the dying cigarette lines that now dominate their income statements. If you own any of these companies, you need to start paying very close attention to the success they are having per mezzo di the effort to find a replacement for cigarettes. Given its U.S. , dealing with this decline is probably most important for Altria.
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Reuben Gregg Brewer has risposta negativa position per mezzo di any of the stocks mentioned. The Motley Fool recommends British American Tobacco P.l.c. and Philip Morris International and recommends the following options: long January 2026 $40 calls acceso British American Tobacco and short January 2026 $40 puts acceso British American Tobacco. The Motley Fool has a disclosure policy.
Why British American Tobacco’s Personalità Shift Is So Important for High-Yield Investors was originally published by The Motley Fool
