CHICAGO -- Fitch Ratings expects stable ratings for the U.S.-based tobacco companies that it tracks, as well as a stable sector outlook in 2015. Fitch's view reflects relatively steady credit profiles backstopped by sustained net price realization in the traditional cigarette category, manageable litigation risk and growing diversification arising from innovation.
Market dynamics will shift during 2015 upon completion of Reynolds American Inc.'s acquisition of Lorillard Inc. In Fitch's estimation, Reynolds American's share of the U.S. market will climb to one-third overall, from around 27% currently; gaining ground on Altria that controls one-half of the marketplace.
Imperial Tobacco's cigarette share will jump to approximately 10% (from 3% presently) with acquired value brands Salem, Winston, Maverick and Kool.
As U.S. regulation nears regarding menthol cigarettes and other tobacco products like electronic cigarettes, Fitch does not see egregious oversight that would negate the growth prospects of the promising e-cigarette smoking alternative. Nor does Fitch expect an immediate or "Day 1" ban on the sale of menthol cigarettes in the United States, but a more paced approach akin to the extended period adopted by European regulators.
Fitch anticipates tobacco manufacturers having sufficient flexibility during 2015 to execute financial policies that direct substantial rewards to shareholders through large dividend streams and opportunistic share repurchasing; however, cash flow stresses from negative industry factors, notably mid-single-digit cigarette-volume declines, will continue through the long term. These dynamics may result in an inflection point in the long term whereby cash flow measures may no longer be reflective of investment-grade status, unless firms scale back aggressive financial policies.
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