Earlier this week Maryland legislators passed a law to increase taxes on tobacco products, making it one of the 10 states with the highest tobacco taxes. Altria (MO) and its operating company Phillip Morris (PM) produce the popular brand Marlboro cigarettes among other tobacco products didn’t even flinch. Neither did the other tobaccos stocks. In fact, both of these stocks saw their 1-year return over 30%. MO 31.9% and PM 33.6%.
Why the immunity to increasingly harsh legislation?
A Business Partner
In late 1998, tobacco companies agreed to a settlement of nearly $250 billion to be paid to 46 states. This money was to be used in a fund to discourage kids from using tobacco products and cover some health care costs related to smoking. Here’s the kicker: the states are using this money elsewhere. Tobaccofreekids.org reports that of the $25.6 billion that will be collected in taxes and settlements from tobacco this year, 1.8% will be spent on programs to help smokers quit and prevent kids from smoking. That’s just $0.02 of every dollar collected.
This means the states are relying on this money for other programs in their budget, and therefore need the tobacco companies to make money. If the states need the revenue generated from tobacco products, then they need people to keep using them. It’s not in the states’ best interest financially for people to stop smoking. That probably helps explain why Nevada, New Hampshire, Connecticut, and Ohio are spending zero state funds towards the prevention of tobacco use.
Nature of the Beast
Tobacco stocks may also be immune because of their addictive nature. People addicted to cigarettes are still going to smoke, even if there’s a recession. Because of the stress involved during tough economic times, long-time smokers may even start smoking more.
From 2004-2009, the number of smokers has remained relatively steady (23.5% in men, 18% women) but the price of a pack of cigarettes has gone up.
The actual number of cigarettes being consumed in the US is decreasing, but tobacco is not just a domestic product. Developing countries especially are a large revenue generator for tobacco companies. The World Health Organization reported that of the 1.8 billion people aged 10-24 who smoke- 85% of them live in developing countries. In first world countries, smoking is decreasing slowly, but almost 80% of the world’s smokers live in developing or middle income nations, and that number is rising.
Business Section: Investing Ideas
Tobacco companies are well aware of the increasing global trend of cigarette use, and they will be sure to take full advantage of it. Smoking is not going anywhere in the US because the states need the revenue from taxes to finance their operations.
Every one of the stocks listed below has experienced a positive 1-year return. Is it possible that tobacco stocks are immune to the legislation that taxes them? Past and recent history has shown us that they just might be.
Don’t forget, Phillip Morris is a former Dog of the Dow.
Use the Compar-O-Matic to analyze 1-year returns for major tobacco companies:
1. Altria Group Inc. (MO, Earnings, Analysts, Financials): Engages in the manufacture and sale of cigarettes, smokeless products, and wine in the United States and internationally. Market cap at $71.2B, most recent closing price at $34.99.
2. Philip Morris International, Inc. (PM, Earnings, Analysts, Financials): Engages in the manufacture and sale of cigarettes and other tobacco products in markets outside of the United States. Market cap at $151.96B, most recent closing price at $89.34.
3. Reynolds American Inc. (RAI, Earnings, Analysts, Financials): Through its subsidiaries, manufactures and sells cigarette and other tobacco products in the United States. Market cap at $26.11B, most recent closing price at $425.49.
7. Alliance One International, Inc. (AOI, Earnings, Analysts, Financials): Engages in purchasing, processing, storing, and selling leaf tobacco to cigarette manufacturers and other consumer tobacco products worldwide. Market cap at $319.81M, most recent closing price at $3.66.
8. Star Scientific, Inc. (CIGX, Earnings, Analysts, Financials):Engages in the development, implementation, and licensing of tobacco curing technology that prevents the formation of carcinogenic toxins present in tobacco and tobacco smoke, primarily the tobacco-specific nitrosamines (TSNA). Market cap at $727.08M, most recent closing price at $4.99.
(Written by Ryan Horch)
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Dig Deeper: Access Company Snapshots, Charts, Filings
- Altria Group Inc. (MO, Chart, Download SEC Filings)
- Philip Morris International, Inc. (PM, Chart, Download SEC Filings)
- Reynolds American Inc. (RAI, Chart, Download SEC Filings)
- Universal Corp. (UVV, Chart, Download SEC Filings)
- Lorillard, Inc. (LO, Chart, Download SEC Filings)
- Vector Group Ltd. (VGR, Chart, Download SEC Filings)
- Alliance One International, Inc. (AOI, Chart, Download SEC Filings)
- Star Scientific, Inc. (CIGX, Chart, Download SEC Filings)
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