Swedish Match

Hey, we've got a match!

When I think of tobacco, I automatically think of cigarettes. The marketing departments of Altria & Co. have really done a thorough job there. Of course, I also know pipe tobacco, cigars or snuff, even though they're nowhere near as widespread. Snus, on the other hand, I had never heard of. And at this point I'd really be interested to know how that is for you?! Please let me know in the comments below whether you already knew about snus.

If you look at statistics on smoking habits in Europe, you'll notice that smoking rates are extremely low, especially in Scandinavia. Still, people don't want to give up their little indulgences entirely. Snus, heated tobacco powder in small pouches that you place between your lip and gum, goes back to a long tradition in Northern Europe. The world's leading manufacturer of this type of tobacco is Swedish Match.

The history and business model of Swedish Match AB

The history of Swedish Match goes back to the industrial magnate Ivar Kreuger. His ancestors had already emigrated to Sweden in the first half of the 17th century. The Kreugers were without a doubt a hard-working and ambitious family. Ivar's great-grandfather was already a successful wholesale merchant. His grandfather started producing matches and was able to take over several smaller businesses. Ivar's father carried on the business and was able to buy up more match factories. During this time, the match was decisively improved. Instead of harmful white phosphorus, the much safer red phosphorus was used from 1844 on. As a child, however, Ivar had little interest in the family business. He did have an entrepreneurial streak, though. As a student, for example, he once snuck into the principal's office, stole exam questions and sold them to his classmates. After school, he studied engineering, but then traveled the world for a while first. He worked odd jobs for several years in South Africa, Germany, Canada and the USA. At 28, he finally returned to Sweden. During this time, his brother was running the struggling family business.

The new electric lighting caused massive drops in sales in the match industry. On top of that, Kreuger's main competitor Jonkoping & Vulcan managed to gain a 75 percent market share. Ivar took on the challenge, founded the company Svenska Tändsticks and began buying up the remaining market participants. He artificially inflated the value of his company so much that in 1917 he finally managed to take over his competitor. After the end of World War I, he shifted his focus to all of Europe. Using questionable business practices, he gradually bought up a lot of match manufacturers. He would always send undercover partners ahead, who made a takeover offer that was far too low. Then he came along and made a better, but still extremely low offer, which was usually accepted wistfully. During this time, he also granted generous loans to several struggling countries, including Germany. Besides the regular interest, this way he also secured an absolute monopoly for his matches in the respective countries. With these tactics, Kreuger managed to build his global company in a very short time.

However, the house of cards began to collapse in 1930. The Great Depression and the subsequent stock market crash hit Kreuger's empire too. Expected loan payments failed to come in, he could no longer pay his liabilities, and no matter what he tried, he couldn't save his company. Finally, in 1932, he was found shot dead in his Paris apartment. Even though suicide was assumed, murder couldn't be ruled out. Over the years, he had made a lot of powerful enemies. Svenska Tändsticks was ultimately bought up and restructured. Swedish Match, as the company has called itself since 1980, was still the world market leader in the match business, but nevertheless decided to broaden its base. So in 1992 it bought the Swedish tobacco company Svenska Tobaks. However, it quickly focused on niche tobacco products. For this reason, it sold its cigarette division in 1999. Today it's excellently positioned in chewing tobacco, snus, cigars, pipe tobacco and, of course, lighters and matches.

How will Swedish Match develop in the future?

Here I'm actually pretty confident. Swedish Match has proven many times in the past that it can survive times of crisis and, if necessary, quickly reposition itself. Especially in our fast-paced times, that's an extremely advantageous trait. Sweden was the only country that had already reached the WHO goal of reducing cigarette smoking to below 20% of adults by 1999. That gives Sweden the most effective anti-smoking policy in Europe. Of course, it would be utopian to believe that all nicotine addicts were suddenly cured. No, most ex-smokers switched to snus. By the way, the trend toward fewer and fewer smokers continues to this day. At the same time, the consumption of snus is rising. A trend that Swedish Match recognized early and used to its advantage.

Snus is also becoming more and more popular in America. So it's no wonder that other tobacco companies are now investing massively in the smoke-free alternative too. Swedish Match, however, is a decisive step ahead of its rivals. Recently, the Food and Drug Administration allowed the Swedes to advertise some of their products as less harmful than cigarettes. Swedish Match is the first company to have received this permission. With this label on the packaging, it will be able to grow its snus sales even faster.

But that's not all - Swedish Match went one step further. It has now sent a new tobacco-free version of snus into the race - ZYN. These are small nicotine pouches that, just like snus, are tucked between lip and gum. The new product is already available at over 67,000 retailers in the USA - and counting. To meet the growing demand, it's currently building a new factory that is supposed to produce around 200 million cans a year from 2022 on.

Swedish Match still produces lighters and matches too. But if you look at the profit breakdown, you can see how small this business has become. 60 percent is earned with snus and other smokeless tobacco, 36 percent with other tobacco products and only 4 percent with the "Lights" division.

Can the dividend continue to be paid and increased?

In 1996, when the company went public on the Stockholm stock exchange, it paid out its first dividend to shareholders. Since then, the dividend has been raised every year, with the exception of 2013. Back then, it couldn't increase the dividend, but at least it didn't have to cut it. The dividend growth rate over 10 years is a decent 11 percent. It recently announced it would raise the dividend this year by a whopping 19 percent. That's definitely great dividend growth. At 2.0 percent, the current dividend yield is significantly lower than at some other tobacco companies. But that's actually no surprise if you look at the companies' share prices. At 53 percent, the payout ratio isn't low, but it's still within an acceptable range.

Conclusion:
The Scandinavian company Swedish Match had a fascinating history that reads almost like a crime novel. Today, the group concentrates on various niche tobacco products, offering consumers a much less harmful smoke-free alternative. Of course, these products aren't healthy either, but I'm sure that little indulgences like these will continue to play a big role in our society in the future. In my opinion, dividend investors who want to diversify more broadly while also benefiting from the Scandinavians' success are well served here.