Market Overview

A Tobacco Reunion Would Be Huge For Consumer Staples ETFs

A Tobacco Reunion Would Be Huge For Consumer Staples ETFs

It may not happen, but if tobacco giants Phillip Morris International Inc (NYSE: PM) and Altria Group Inc (NYSE: MO) merged, it will be a boon for consumer staples exchange traded funds such as the Consumer Staples Select Sector SPDR (NYSE: XLP).

It's just speculation for now, but as Bloomberg notes, following Reynolds American (NYSE: RAI)'s recently completed $28 billion acquisition of Lorillard, pickings are slim for acquirers in the tobacco industry leaving Phillip Morris and Altria to possibly consider getting remarried.

Figuratively speaking, that reunification would be a big deal as Phillip Morris and Altria had market values of $132.6 billion and $108.6 billion at Tuesday's close. The stocks are the third- and sixth-largest holdings in XLP, the largest consumer staples ETF, combining for almost 13 percent of the ETF's weight.

The consumer staples sector is not on par with healthcare in terms of the steady influx of almost weekly mega-deals, but staples are not foreign to the concept, either. Earlier this year, Heinz and Kraft came together in a roughly $49 billion deal, creating Kraft Heinz Co (NASDAQ: KHC). In February 2013, Brazilian private equity shop 3G and Warren Buffett's Berkshire Hathaway (NYSE: BRK-B) teamed up to pay $23 billion for Heinz. Kraft Heinz is XLP's 12th-largest holding at almost 2.6 percent of the ETF's weight.

Still, XLP has also been fertile ground for deals that have never come to pass, such Nelson Peltz's proposed PepsiCo (NYSE: PEP) for Mondelez (NASDAQ: MDLZ) idea. On the other hand, CVS Health Corp (NYSE: CVS) has been a savvy shopper and Walgreen Boots Alliance (NYSE: WBA) is the combination of a merger.

Investors looking for a staples ETF that could see some deal-making, though not par with an Altria/Phillip Morris marriage, can consider the PowerShares DWA Consumer Staples Momentum Portfolio (NYSE: PSL).

The $139.3 PowerShares DWA Consumer Staples Momentum Portfolio, which weights its 32 holdings based on momentum factors, not market value, houses several credible takeover targets, including Hain Celestial (NASDAQ: HAIN), Monster Beverage Corporation (NASDAQ: MNST) and WhiteWave Foods (NYSE: WWAV).

Plus, if Altria is acquired, PSL will not be left out in the cold. The ETF allocates over 9 percent of its weight to tobacco stocks, all of which is devoted to Altria and Reynolds American, and Altria is PSL's largest holding at a weight of almost 5 percent, according to PowerShares data.


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