Tobacco.org

Cigarette Makers: Burning Hot or Up in Smoke? 

Key Points

* Cigarette industry stocks have been trading higher as they represent a safe haven investment and have been reporting higher profits due to strong pricing power.

* Cigarette volumes have been on the decline amid higher prices and anti-smoking advertising campaigns, which has led to a sharp drop in demand.

* New regulations could inhibit new products from quickly entering the market, but help already-established companies maintain their dominance.

* Eventually, lower volumes will take their toll on bottom-line results as price increases cannot be relied on indefinitely to support net income.

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Who's Serving Up Smoking Results? 

As global excise taxes on tobacco products continue to rise, the cigarette producers have their work cut out for them in protecting profits in spite of declining volume. Smaller producers such as Vector Group (NYSE: VGR) could be particularly at risk as consumers decide how much they're willing to pay for a cigarette break.

Domestically, Altria hasn't fared much better, with declining sales and volume owing in part to rising excise taxes, while Reynolds American (NYSE: RAI) also reported an 11% volume drop. On the other hand, Lorillard (NYSE: LO) served up a better-than-average 6.1% volume decrease even as it showed a 2.6% increase in operating income. British American Tobacco holds a 42% stake in Reynolds American.

While the tobacco market isn't growing in the U.S. now, consumers here aren't completely scared off by increased excise taxes. Similarly, global tax increases are just beginning to unfold. And while those taxes are not likely to kill the industry, global consumers are increasingly turning to gray- or black-market smokes as a result of increased excise taxes, leaving growth prospects for premium products like Marlboro in some jeopardy.

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• Tobacco groups ask Obama to challenge Canadian ban 

Philip Morris International joined with U.S. tobacco industry groups on Thursday to ask President Barack Obama's administration to challenge Canada's new law banning flavored cigarettes and small cigars.

Their request comes even as the administration takes its own steps to ban candy, clove and other flavored cigarettes.

"Canada's ban on blended cigarettes violates its WTO (World Trade Organization) obligations and could impose serious economic hardship on U.S. growers of burley tobacco," Roger Quarles, president of the Burley Tobacco Growers Cooperative Association, said in a statement.

"We are asking USTR (U.S. Trade Representative) to review our arguments and to take a strong stand for U.S. burley growers and American jobs," he said.

Philip Morris, which markets its tobacco products in approximately 160 countries, joined the burley growers and several other tobacco associations in asking USTR to press Canada on the issue at a WTO meeting on "technical" trade barriers next week in Geneva.

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• Texas lost $19.5 million to Madoff 

The Texas treasury lost $19.5 million through an investment in the Ponzi scheme run by convicted financial swindler Bernard Madoff.

The money was part of a $224.5 million investment the Texas Treasury Safekeeping Trust Co. had with a Texas-based hedge fund called Austin Capital Safe Harbor. Austin Capital closed in May due to losses it suffered in one of Madoff's scam investment funds.

Comptroller Susan Combs chairs the Treasury Safekeeping Trust, which manages $50 billion in tobacco lawsuit settlement funds, TexPool investments for 2,000 local governments and Treasury Pool for managing state funds.

Combs spokesman R.J. DeSilva said the $19.5 million was written off last December after Austin Capital notified the state the money had been lost when Madoff's Ponzi scheme collapsed. The treasury had been investing with Austin Capital since 2006.

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Reynolds American board boosts dividend (PDF) 

The board of directors of Reynolds American Inc. (NYSE: RAI) today announced a 5.9 percent increase ($0.05 per share) in the company’s quarterly cash dividend.

The new quarterly dividend on the company’s common stock is $0.90 per share ($3.60 per share annualized). The board declared the dividend payable on Jan. 4, 2010, to shareholders of record on Dec. 10, 2009.

“I am very pleased to announce this dividend increase, which reflects the continued strength of our business,” said Susan M. Ivey, RAI’s chairman, president and chief executive officer. “The increase reaffirms our commitment to shareholders and maintains our policy of returning about 75 percent of the company’s net income to our shareholders in the form of dividends.”

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Up in Smoke: What Is The Future For The Global Tobacco Industry? 

Globally the cigarette manufacturing industry continues to battle a four-pronged assault on its growth prospects. Rising consumer health consciousness has hit smoking rates in developed and emerging markets alike, putting the breaks on global industry growth rates. An increasingly mainstream and dogmatic anti-smoking lobby has also served to dent sales, helping to drive through prohibitive legislation and raise awarenessof the dangers of smoking.

Ongoing government tax hikes-an increasingly accepted form of revenue-raising given the number of health-conscious consumers turning their backs on smoking-are similarly proving an enemy to the industry, as is the still-strong illegalt rade for tobacco products.

Facing up to the challenges of a so-called 'dying industry'has led to rapid industry consolidation, with the big three-Philip Morris International, BritishAmerican Tobacco and Japan Tobacco International-controlling around 45% of the global cigarette market. Presently, however, these giants, and their smaller local peers, are having to deal with a new challenge in addition to the aforementioned daily hurdles-a consumer-confidence crippling global recession. In 2009, BMI is forecasting a global economic contraction of 2.5%.

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New Jersey Tobacco Settlement Bonds Are Smoking: Chart of Day 

Now may be the time to sell your tobacco bonds.

The CHART OF THE DAY shows how one issue, the Tobacco Settlement Financing Corporation of New Jersey’s 5 percent bond due in 2041, has outperformed the Bond Buyer 40, a price index of long-term benchmark municipal debt, since the end of the first quarter of 2009. The New Jersey security gained 83 percent by the end of the third quarter, while the index rose 32 percent.

Long-term tobacco bonds, sold by states and municipalities to cash in on their shares of the 1998 settlement with cigarette makers, have rallied more than any other major segment of the municipal market this year, according to Bank of America Corp.’s Merrill Lynch & Co. About $37 billion of such bonds have been sold.

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• Croydon Council criticised for investing pension money in tobacco firm 

The council has been accused of dealing with "traders in death" by investing in tobacco companies.

The attack came from Cllr Maggie Mansell, Labour's shadow cabinet member for health at Monday's meeting of the council's cabinet which backed a new anti-smoking strategy to reduce tobacco consumption across the borough.

The council has around £20m of its pension fund for employees tied up in shares in Imperial Tobacco and British American Tobacco.

Cllr Mansell said while she supported the strategy itself, she wondered how many people would be puzzled by the investments in the industry.

She said: "The tobacco companies are drug traders, they are traders in death."

But Cllr Dudley Mead, who chairs the council's pensions committee, made it plain at the meeting that investments would go on.

He pointed out that in 1995 the then Labour council had refused to invest in tobacco companies and he believed that until the investments were restored by the Conservatives the policy had cost the pension fund £35m.

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Ahead of the Bell: Tobacco companies  

A Credit Suisse analyst downgraded Altria Group Inc. Monday, worried about possibly declining Marlboro prices and the company's ability to balance profit and market share growth for the cigarette brand.

In separate client notes, analyst Thilo Wrede boosted the price targets of peers Lorillard Inc. and Reynolds American ( RAI ) Inc.

Wrede said Altria ( MO)'s Marlboro has been underperforming, and reported market share loss in its most recent quarter. The analyst anticipates the Richmond, Va.-based tobacco company may have to cut prices of the cigarettes as unemployment continues to climb.

Wrede dropped Altria to "Neutral" from "Outperform" and reaffirmed a $20 price target.

The analyst still believes Lorillard is the best tobacco company in the U.S.

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Altria Shares Pack Less Punch 

WE ARE DOWNGRADING Altria Group (ticker: MO) from Outperform to Neutral.

We are getting increasingly concerned about Altria's ability to balance profit and market share growth for Marlboro and are concerned that Marlboro prices will be lowered in the next few quarters. In moist smokeless tobacco (MST) we now believe that the return to growth for Copenhagen and Skoal will take longer than initially thought and might require additional pricing, which could reduce the profitability of the brands.

Prices for Marlboro and MST might have to be reduced.

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Altria Blazes On (MO) 

In the new world of big tobacco, Altria (NYSE: MO) seems to be marching to the beat of its own drummer.

Reynolds American (NYSE: RAI) and Lorillard (NYSE: LO) have joined forces to continue their fight with the government over increased tobacco regulation. Last week, the dynamic duo launched a lawsuit questioning the free speech (i.e., advertising) ramifications of FDA control over the tobacco industry. Kissing cousin Philip Morris International (NYSE: PM) is fighting its own battles with British American Tobacco (NYSE: BTI) for the title of big-time international tobacco player.

Meanwhile, Altria announced plans to expand its product portfolio with Copenhagen-brand wintergreen smokeless tobacco. The new product could drive Copenhagen's share of the segment from 23% to 32%, according to a company spokesperson. In addition, the company is introducing a value-priced L&M menthol cigarette product, and it continues to look for growth opportunities with its Marlboro Snus.

It's been a year since Altria bought snuff-and-wine connoisseur UST, so it's about time for the product development and overall integration synergies to kick into gear with the new Copenhagen product. Interestingly, Altria says that it has no plans to sell off UST's wine business, although the recent problems that wine and spirits makers like Diageo (NYSE: DEO) face probably make it an inopportune time to divest the booze business. Besides, Altria owns 28% of SABMiller (OTC: SBMRY), so the company isn't completely uninformed on the alcohol market. . .

In the end, though, Altria comes out smelling more like a rose than a burned-out cigarette. The company gets to support the new FDA legislation of the tobacco industry and maintain a relatively decent public image. It thus avoids the costs of an expensive lawsuit, while continuing to introduce new products and expand its share in a declining market. With this scenario playing out, and a P/E of 12.2 and annual yield of 7.3%, I'd say that Altria has smoldering growth potential for investors in the short and long terms.

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5 Tobacco Stocks That Should Thrive Despite Legislation  

As prohibition taught us, the more a government restricts a product, the intrinsic demand rises and the more profitable the product becomes. Well-cured tobacco leaf is still a worldwide indulgence and few areas grow tobacco of better quality than in the United States. Tobacco companies will pursue ways to cut the cost of tobacco products (such as making shorter cigarettes that are being successfully test-marketed in Florida and elsewhere). Tobacco companies will enhance their marketing offshore and offer U.S. quality tobacco and products other countries cannot match.

The huge lawsuits against Big Tobacco are winding down and the Feds and State governments, having squandered most of the billions in tobacco settlement monies, have no legal means to extort more monies from the tobacco companies. . . .

Here are some tobacco companies that are likely to thrive under almost any Federal legislation: . . .

With prescription drugs floating about in our nation's water supply, mass killings on or southern borders and elsewhere as gangs smuggle tons of illegal narcotics into the country, meth labs and worse cooking up fatal brews for hundreds of thousands of addicts nationwide, marijuana a primary income source for many of America's rural counties and alcohol taxed and given a wink and a nod by government so long as taxes are paid, cigarettes seem to be, while not benign, certainly a less fatal avenue of relaxation that society should accept without encouraging.

Tobacco companies know this, and will adjust their product to compete positively with more sinister plants, drugs and other concoctions.

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Altria Increases Quarterly Dividend 6.3% 

Altria Group, Inc. (Altria) (NYSE:MO) today announced that its Board of Directors voted to increase the company's regular quarterly dividend by 6.3% to $0.34 per common share versus the previous rate of $0.32 per common share. The new annualized dividend rate is $1.36 per common share. The quarterly dividend is payable on October 9, 2009 to stockholders of record as of September 15, 2009. The ex-dividend date is September 11, 2009.

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• Pension policy goes up in smoke 

Washington County Commissioner Bracken Burns was fuming Thursday when it appeared that a ban on tobacco-related stocks in the county employees' pension fund was about to go up in smoke.

Even after Burns read an eight-minute statement on tobacco-related mortality statistics and the high cost of illness from smoking, the retirement board voted 2-1 to lift a restriction excluding tobacco stocks from its employees' pension portfolio.

"These people are actively in the business of addicting our young folks to a known carcinogen," Burns said of tobacco companies after the meeting. "The link between tobacco and cancer death and the deleterious effect it has on our society is 100 percent clear."

Burns said he quit smoking 40 years ago, but that wasn't the reason he favored a continuation of a tobacco-stock ban he and then-members of the retirement board voted for 12 years ago.

The two votes to reverse the no-tobacco stocks policy were also those of nonsmokers: Commission Chairman Larry Maggi and Controller Michael Namie, who were not on the board in 1997.

While each said they had no quarrel with Burns' statistics, Namie cited a report in June from Twin Capital Management that the county's investment restrictions, "particularly the 5 percent initialization restriction on Exxon Mobil and the restriction on tobacco holdings," were responsible for about 30 percent underperformance.

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Health insurers want you to keep smoking, Harvard doctors say 

Why is it a big deal? "If you own a billion dollars [of tobacco stock], then you don't want to see it go down," says Himmelstein, "You are less likely to join anti-tobacco coalitions, endorse anti-tobacco legislation, basically, anything most health companies would want to participate in."

The letter is the third report that the doctors--who all support a national health care program--have published in the last 14 years.

We decided to check in with some of the insurance companies mentioned in the letter to learn more about their policies with respect to tobacco stock. Prudential was unable to respond by press time. Sun Life, however, flatly denied the charges.

"Sun Life does not carry significant holdings in tobacco stocks," says representative Steve Kee, . . .

Himmelstein rechecked his numbers in the Osiris database, and said, "I fear that if Sun Life has a dispute, it is with Osiris not with us."

In any event, the doctors' persistence over the years seems to be working to some extent. They targeted MetLife and Cigna in their 1995 and 2000 letters to medical journals, but neither is listed in the latest reckoning

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