Tobacco.org

Why Analysts' Negative Commentary On The Tobacco Industry Is Just Wrong  

The most glaringly negative commentary about Altria's earnings report came from Barron's, a respected publication that is also known to sometimes echo the thinking of many in the hedge fund industry. In a recent piece, written several days ago after Altria released earnings, Barron's author Sandra Ward seemed to come close to declaring the tobacco industry a dead zone for investors.

Ms. Ward started her article by citing a Morgan Stanley analyst who has not recommended any of the big three tobacco names in the U.S. for three years. She stated that he is shockingly not currently recommending them because of difficulties these companies face in operating in the U.S. Of course, during the past three years, U.S. tobacco stocks have paid dividends of roughly 5%-7% a year, and have appreciated between 40%-60% without including the dividend. Nonetheless, she cited this author to suggest that the operating environment for tobacco companies in the U.S. has mysteriously become more difficult over the past six months.

Her main points to back this argument up were that Altria's flagship brand is not growing its market share, fewer people are smoking cigarettes today, and, with cigarette prices now at nearly $6 a pack on average nationally, tobacco companies will have a harder time putting through future price increases. Now, call me crazy, but I think anyone with half a brain could have made all these arguments three or four years ago.

The reality is that Altria's quarter was very strong, and the strength of Altria's latest quarter came in a very difficult economic environment. Altria may sell an addictive product, but it still sells a premium product that is priced higher than that of many of competitors. Despite operating in what I agree is a difficult economic environment, Altria's numbers were very strong by any metric. . . .

As an attorney, I follow major developments in the litigation process at both the state and federal level very closely. Looking at recent legal and regulatory developments, I don't see any changes in the legal environment for the tobacco industry over the past year that have been anything but positive for these companies. I'm also not quite sure why these old arguments are suddenly relevant now.

The Department of Justice's multi-decade federal lawsuit against the big three tobacco companies was thrown out nearly two years ago. The States have already settled with big tobacco and are issuing tobacco bonds going out 10 years. Under the Master settlement agreement, the four largest tobacco companies have agree to pay $206 billion to state governments over the course of the next 25 years. The payments are prorated to each company's respective market share and revenue. While this number sounds big, it means companies like Altria pay a couple billion a year to state governments, and have no worries about future lawsuits from state governments in the future.

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Council leader Nash Ali defends Town Hall's £32m tobacco pension investment 

Cllr Ali (pictured) said on Tuesday: "As a council we do not encourage people to use tobacco and actively carry out work to discourage its use, but like every pension fund across the country we have a legal duty to our members and, in the case of council pension funds, council taxpayers to secure the best investment returns available." . . .

"I can see how this could be of concern to our residents and, as someone who is trying to kick the habit, it is a grim investment, but tobacco is a legal product and, in a time of financial pressure for councils, our pension fund should not become a further burden on local council taxpayers."

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VIDEO: Risk Vs Reward: Less Volatility in Tobacco  

Bloomberg’s Dominic Chu reports on risk adjusted returns for the tobacco industry. (Source: Bloomberg)

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• Cigarettes Are Safe as Long as You Just Invest: Riskless Return  

Tobacco companies handed investors the best returns in the last decade when adjusted for volatility, and analysts at BNY Mellon Wealth Management and Janney Montgomery Scott LLC say that will continue as profits prove resilient amid economic turmoil.

The BLOOMBERG RISKLESS RETURN RANKING shows the MSCI World Tobacco Index had the highest return out of 67 groups in the MSCI World Index in the 10 years through 2011. The tobacco gauge, which comprises eight companies including Philip Morris International Inc. and Japan Tobacco Inc., advanced 13.3 percent after taking into account price swings, almost five times the gain of the broader measure.

Tobacco stocks brushed off surging volatility during the dot-com tumble, the worst financial crisis since the Great Depression and Europe's debt crisis, because smokers are reluctant to scale back when cigarette prices rise or the economy struggles, so companies can give cash back to investors at a stable rate. The industry, which fended off multibillion dollar lawsuits over the past two decades, will weather more regulation and a review of whether to ban menthol, said Murray Kessler, head of Lorillard Inc., maker of Newport, the top- selling U.S. menthol cigarette. . . .

The companies' financial strength has been underestimated by rating firms, data compiled by Bloomberg show. Altria Group Inc. and Reynolds American are the two most underrated companies in the Standard & Poor's 500 Index, based on the difference between assessments from credit-rating companies and those given by Bloomberg. Altria's one-year credit rating is A2, Bloomberg data show, while its long-term credit rating in the market is BBB. Lorillard is the 12th most-underrated.

Tobacco "is so reviled and under-owned by investors," said Tom Russo, who manages more than $4 billion, including shares of Philip Morris, British American Tobacco Plc and Altria, for Gardner Russo & Gardner in Lancaster, Pennsylvania. "The pressure from critics has made the industry more practical and pragmatic."

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Thank You for Smoking  

Amidst the gloom, though, a light was shining, The glow of a match, one might say, held to the tip of a cigarette. Tobacco stocks, those most reviled of companies in some times and in some quarters, posted strong gains while almost everything else was falling. Managers who owned them in bulk reaped the benefits. When you look at the top international funds of 2011, don’t be surprised if you smell smoke.

No Passing Fancy

For the most part, the managers with substantial weightings in tobacco-related stocks were not simply running for cover, shifting to defensive stocks in a year when riskier options were getting pounded by investors. Most of these managers have had a liking for tobacco, so to speak, for many years.

A prominent example is the team at the helm of Tweedy, Browne Global Value(TBGVX) . . .

Of course, tobacco stocks alone don't explain these funds' showings in 2011. Most also had substantial stakes in other consumer-oriented companies, such as beverage makers or distributors or household-goods companies, and on the whole those types of stocks also held up well last year. Moreover, it's worth noting that even though these managers have owned tobacco stocks a long time and have faith in their long-range prospects, that doesn't mean such firms will consistently outperform as they did in 2011. The circumstances were unusual, to say the least. When investors are willing to take on more risk, such stocks likely won't be as much in demand. (The first month of 2012 provides an example.)

Readers thus should not take this as a recommendation to pursue funds with big tobacco stakes (or to go out and buy tobacco stocks). Rather, the point is to show how unpopular or unexciting companies, the type that can have fund shareholders wondering if the manager is asleep at the switch, can eventually prove to be very valuable indeed.

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'Sell tobacco shares' Nottinghamshire County Council urged 

Nottinghamshire County Council's £36m investment in tobacco firms as part of its pension scheme has been criticised by a doctor.

Dr Greg Place, chairman of a committee which represents GPs in the county, said the authority should "publicly disinvest".

He said supporting the industry and promoting health were incompatible.

The council said the amount was 1% of the pension fund investments and it had to get the best return for its members.

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Region’s fund attacked over tobacco investment 

A DAMNING report has slammed the West Yorkshire pension fund after revealing it has £125m invested in tobacco firms – the single largest amount invested by a local authority in the country.

The research, by charities FairPensions and ASH (Action on Smoking and Health), reveals councils across Britain have at least £1.3 bn of employee pensions funds invested in tobacco.

It comes after the Yorkshire Post revealed earlier this month that three of the region’s four funds have major holdings in both tobacco firms and global corporations accused of environmental abuses.

The FairPensions report challenges the claim the funds are bound by fiduciary duty – a legal obligation to act in the best interest of their members and maximise financial returns, and calls for a more “nuanced understanding” of fiduciary duties.

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• Local authority pension funds and investments in the tobacco industry (PDF) 

This briefing is a position statement by Action on Smoking and Health and FairPensions which aims to inform stakeholders in local authority pensions, including councillors, pension fund members, local taxpayers and pension fund trustees.

Local authority pension funds in the UK have attracted public criticism for holding investments in the tobacco industry. There are three common responses to this criticism, each of which will be examined in this briefing:

1. Local authority pension funds have a legal duty to maximise financial return and cannot give consideration to ethical issues.

2. Pension fund trustees do not interfere with the day to day decisions of external investment fund managers.

3. Tobacco is a low risk, high return investment.

This briefing challenges the claim that local authorities are in effect ‘duty bound’ to invest in tobacco and:

1. clarifies the law regarding the legal duties of pension fund trustees and explains the options for trustees wishing to properly consider ethical concerns around investments in the tobacco industry;

2. counters common misconceptions about the fiduciary duties around investments; and

3. provides information on the financial risks facing the tobacco industry which raises doubts about its long-term investment viability.

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UK Local authority pension funds should give up investing in tobacco, report claims 

A new report by FairPensions and ASH (Action on Smoking and Health) has challenged the long held view that UK local authority pension funds can hold 'unethical' assets such as tobacco in order to fulfil a legal duty and  maximise investment returns

With tobacco sales declining for the first time in 2010 and savers continuing to express concerns over whether their money is invested 'ethically', the report claims to expose misconceptions surrounding investors' duty to have tobacco as part of their portfolio. 

The report is launched with figures showing that councils across Britain have at least £1.3bn of employee pension funds invested in tobacco.

Both organisations claim that the three most heard arguments in favour of schemes investing in tobacco can no longer be upheld.

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Altria Group Inc. Fourth Quarter Earnings Sneak Peek 

S&P 500 component Altria Group, Inc. will unveil its latest earnings on Friday, January 27, 2012. Altria Group manufactures and sells cigarettes and tobacco products as well as maintaining a portfolio of leveraged and direct finance leases.

Altria Group, Inc. Earnings Preview Cheat Sheet

Wall St. Earnings Expectations: The average estimate of analysts is for net income of 49 cents per share, a rise of 11.4% from the company’s actual earnings for the same quarter a year ago. During the past three months, the average estimate has moved down from 50 cents. Between one and three months ago, the average estimate moved down. It has been unchanged at 49 cents during the last month. Analysts are projecting profit to rise by 6.8% versus last year to $2.03.

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• Councils told to stub out big tobacco pension deals 

Hundreds of millions of pounds of taxpayers' money has been invested in the tobacco industry by councils which next year take on responsibility for public health, an investigation by The Independent has revealed.

Councils across England and Wales have at least £1.3bn of employee pension funds invested in tobacco companies such as Imperial and British American Tobacco, though the true figure is likely to top £2bn, with individual local authorities investing up to £125m each. The revelation last night prompted widespread condemnation from public health leaders trying to reduce the burden of smoking on the NHS.

It follows an announcement by the Health Secretary, Andrew Lansley, that £5.2bn will be available for public health spending in the year from April 2013, with councils set to receive just over £2bn to help reduce health inequalities and promote healthier lifestyles.

Last night health campaigners accused councils of a serious conflict of interest that would undermine the credibility of their public health efforts.

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Tobacco stocks prove hard habit to kick 

British American Tobacco and Imperial Tobacco have failed to beat the FTSE 100’s annual performance only four times since 1999. The total returns over the past decade are second only to mining, and with much lower volatility, meaning the tobacco makers’ reputation as defensive has been well earned.

Spending £1,000 on BAT or Imperial in that year would by now have returned £9,370 and £6,340 respectively, including gross dividends, compared with a £1,510 total return for the FTSE 100 as a whole.

But, recently, their defensive strength has shown signs of weakening. BAT and Imperial shares were sidelined during the FTSE 100’s rally from an 18-month low since October, and are both in negative territory for the year so far. “It appears that, like a smoker trying to kick the habit, investors attempt giving up on the sector each new year, perhaps trying to convince themselves that they are better off without it,” says JPMorgan Cazenove analyst Rae Maile. “Last year it was not long before the cold sweats set in, and the comforting presence of cigarettes in portfolios was sought again. This year may well prove little different.”

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Altria Proves Beer And Cigs Are Good Business 

Altria Group had a pretty good 2011 which saw the stock gaining more than 20%.

It was a fantastic year for the tobacco industry, with Altria, Lorillard and Reynolds American, the three biggest tobacco companies by market capitalization, all significantly outperforming the broader indices.

Altria’s diverse portfolio of products offer potential for further upside. The company is scheduled to announce its Q4 earnings on January 26.

We have a $31 price estimate for Altria, which is about 10% above the market price. . . .

Altria is well positioned to increase its market share in this fast growing segment, and we expect the size of smokeless products to grow at an annual rate of 7% over the next few years.

Altria operates in the smokeless tobacco segment through Copenhagen, Skoal and Red Seal. These are also a hit with the retailers as they enjoy margins as high as 30%. As per our estimates, the smokeless tobacco products constitute 15% of the stock price.

Another important factor that is important for the profitability for the company is that this segment attracts much lower excise duty than cigarettes and thus enjoy high EBITDA margins.

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Altria: Smokeless Tobacco Big Hit 

(Trefis) -- Altria Group(MO) had a pretty good 2011 as the stock gained more than 20%.

It was a fantastic year for the tobacco industry with Altria, Lorillard(LO) and Reynolds American(RAI), the three biggest tobacco companies by market capitalization, outperforming the broader indices significantly.

We believe Altria, which is scheduled to announce its fourth-quarter earnings on Thursday, has a diverse portfolio of products with a potential for further upside.

We have a $31 price estimate for Altria , about 10% above the market price.

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Islamic banks never invest in pork, alcohol and tobacco 

Russia's Finance Ministry is working on legal acts to sign an unusual investment agreement with the United Arab Emirates. Mutual investments will avoid taxation, whereas the Arabs will not have their profit taxed. However, the documents encourage only state-run corporations and funds.

The agreement between the government of the Russian Federation and the UAE "About taxation of the income from the investments of the contracting states and their financial and investment institutions" was signed in Abu-Dhabi on December 7, 2011. However, the information about the document has become available only recently. . . .

The norms of the Islamic banking do not allow any investments in the companies that deal with the production and sales of pork, alcohol and tobacco.

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