Tobacco.org

• 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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Health, life insurers hold billions in tobacco stocks: NEJM article 

More than a decade after Harvard researchers first revealed that life and health insurance companies were major investors in tobacco stocks - prompting calls upon them to divest - the insurance industry has yet to kick the habit, they say.

A new article on insurance company holdings, published in today's New England Journal of Medicine, shows that U.S., Canadian and U.K.-based insurance firms hold at least $4.4 billion of investments in companies whose subsidiaries manufacture cigarettes, cigars, chewing tobacco and related products.

Tobacco products currently contribute to the deaths of 5.4 million people worldwide annually, according to the World Health Organization. Tobacco use is a major risk factor for stroke, heart attack, lung disease and cancer.

"Despite calls upon the insurance industry to get out of the tobacco business by physicians and others, insurers continue to put their profits above people's health," said Dr. J. Wesley Boyd, the lead author of the article. "It's clear their top priority is making money, not safeguarding people's well-being."

To illustrate their point, Boyd and his colleagues point to Newark, N.J.-based Prudential Financial Inc.

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• LETTER: Insurance-Industry Investments in Tobacco (PDF) 

The Obama administration is proposing a major overhaul of the U.S. health care system, and the insurance industry is poised to play a major role in the process. . . .

In case there is any doubt that insurers place profit above health, consider their investments in tobacco. The U.S.-based Prudential Financial provides life insurance and long-term disability coverage and is also a major owner of tobacco stocks, with total tobacco holdings of $264.3 million (Table 1). The U.K.-based Prudential offers life, health, disability, and long-term care insurance. Prudential’s stake in tobacco totals $1.38 billion. Standard Life, which is also based in the United Kingdom and offers both life and health insur ance, owns nearly $950 million of tobacco stock. Canada-based Sun Life, which offers life, health, disability, and long-term care insurance, owns just over $1 billion of tobacco stock. Northwestern Mutual and Massachusetts Mutual Life Insurance Company (MassMutual) both offer life, disability, and long-term care insurance. MassMutual owns more than $585 million of tobacco stock, and Northwestern Mutual’s stake exceeds $235 million. (These figures are accurate as of March 26, 2009, but given the current economic climate, they are subject to change.)

Although investing in tobacco while selling life or health insurance may seem self-defeating, insurance firms have figured out ways to profit from both. Insurers exclude smokers from coverage or, more commonly, charge them higher premiums. Insurers profit — and smokers lose — twice over.

These facts should discomfit Canadian and British readers as their countries consider further privatization of health insurance. For those of us in the United States, these data are a reminder of the true priority of the insurance industry, which is making money, not ensuring health and wellbeing. These data raise a red flag about the prospect of opening vast new markets for private insurers at public expense, as has happened in our state of Massachusetts, whose recent health care reform is often cited as a model for national reform.

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Philip Morris International versus Altria  

Back in 2008 Altria (MO) spun off its global tobacco operations in order to reduce litigation risk. The global tobacco operations are touted as a growth play on emerging markets such as China and Russia. Just because there might be an opportunity for growth, does not really mean however that this growth would materialize. Check my analysis of Altria Group (MO).

While the US is a mature market, where smoking is a habit where a continuously lower percentage of the population is engaging in, the current legislation has created an environment where it is virtually impossible for new players to enter. That way tobacco companies like Altria (MO) could raise prices almost indefinitely in an effort to combat tax increases and decline in demand. Another way that Altria is dealing with this issue is by acquiring competitors in niches it has little presence, as well as streamlining its efficiencies in order to cut costs to the bone. Excise taxes represent a very high percentage of the price of a pack of cigarettes. Thus Federal and State governments have it in their best interests not to ban the use of tobacco products.

However just because Altria is supposed to be a slow growth company and Philip Morris International (PM) is supposed to be growing its EPS at 10-12% annually, does not mean that Philip Morris International would be a better investment over the long run. Investors, who get excited about future growth, tend to bid up the prices of such assets. Risks to this strategy include failures to the realization of the future growth. Thus buying a stock at inflated valuations simply because one expects growth to continue forever might produce inferior long-term returns, relative to the slower growth asset. Philip Morris International (PM) is on my Best High Yield Dividend Stocks for 2009 list. . . .

Overall I am bullish on both stocks, but I do not have a preference for either one of them. While the past 5 years have been great for Philip Morris International, negative legislation could tamper growth in the future. I do like the economics of tobacco businesses, as it costs very little to make cigarettes, which are then sold at much higher prices to the consumer. The product is addictive but there's also an incredible loyalty to brands like Marlboro.

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STOCKS NEWS US-Tobacco index rallies as companies raise outlooks 

The Dow Jones U.S. Tobacco index rallied on Thursday, after two major tobacco companies reported second-quarter results that beat expectations and raised their 2009 outlooks. Philip Morris raised its full-year profit view to $3.10 to $3.20 a share while Reynolds American (NYSE: RAI - news) lifted its view to $4.40 a share from $4.60 a share.

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A World of Growth for Philip Morris? (PM) 

Yep, Philip Morris is going on a shopping spree, to increase its global presence and show British American Tobacco something about being the "most" international. Market leadership is the name of the game for Philip Morris, holder of the precious flagship brand Marlboro. In its quest for global supremacy, Philip Morris purchased Canada's Rothmans last year. With a cigarette market share of 33%, and a majority of the fine-cut-tobacco market in Canada, Rothmans expanded Philip Morris' stake in that market.

Within the past few weeks, Big Phil bought privately held Colombian cigarette maker Protabaco, and pipe tobacco and snuff-maker Swedish Match South Africa. Protabaco currently holds 31.8% market share in Colombia, and it should complement Philip Morris' existing Coltabaco operations there. Swedish Match South Africa will deliver market-leader status to Philip Morris, since it sells 31% of all tobacco consumed in South Africa.

Colombia isn't a bad place for Philip Morris to grow. . . .

Acquisitions, mergers, strategic alliances: Whatever you want to call them, partnerships and purchases are the name of the game for Big Cigs, especially when it comes to global growth. Philip Morris may be formally out of the game in the States, but its counterpart, British American Tobacco, possesses 42% of Reynolds American (NYSE: RAI). Reynolds is second in U.S. cigarette market share, while Lorillard (NYSE: LO) continues to light things up in third place.

Hey, acquisition isn't a bad way to drive expansion when organic growth starts to falter. . . .

Whether Philip Morris International can successfully market itself as a healthy choice for investors remains to be seen. For now, it will have to settle for being the world's "almost" most international tobacco group.

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TEMKIN: Contingent liabilities take the shine off BAT  

THE ink on yesterday’s Business Day was barely dry when I was asked this morning via e-mail, how I would rate the shares of British American Tobacco (BAT) as a long-term investment if the company was not in tobacco, but, say, in retail.

“It seems to me,” the reader goes on, “that you don’t like BAT because you’re antismoking. Your view on the share is subjective. As you keep on saying, look at its investment fundamentals. That’s why I have BAT shares.”

The reader has a point: I won’t invest in BAT because I don’t like what it does and so I won’t invest in its shares. On the face of it, though, BAT appears to be fundamentally in good shape to produce long-term bottom-line earnings per share. In addition it has an exceptionally generous dividend policy pay-out of 65% of bottom-line earnings.

Based on the figures for the financial year to December 31 2008, the company’s return on assets managed was sound. . . .

. . .

BAT’s markets will more probably expand rather than contract. Its operating assets are being streamlined. It has the resources to continue litigation related to the effects of its products.

Before you are tempted to buy the shares, however, read the nine pages on contingent liabilities and financial commitments in note 30 of the 2008 annual financial accounts.

It is a terrifying horror story, and its possible financial implications on future earnings are not quantified.

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• Merton Council shares in cigarette company profits 

A council decision to invest millions in cigarette companies while running anti-smoking campaigns has been branded “hypocritical”.

Despite claims to be working to cut smoking in the borough, a leaked list of the council’s investments shows it holds more than £3.5m of shares in cigarette makers Imperial Tobacco and British American Tobacco.

The council has pledged to reduce smoking in the borough through the Healthier Communities Strategy, a partnership with Sutton and Merton Primary Care Trust.

The partnership’s priorities include running campaigns and offering support to help smokers quit, as well as reducing the habit among young people.

But, on March 31 this year, the council had £2,407,311 invested in British American Tobacco, makers of Lucky Strike and Benson and Hedges cigarettes. And some £1,171,936 was invested in Imperial Tobacco, makers of Lambert and Butler.

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• FDA Regulation Will Broadly Affect Big Tobacco 

All of these policies may in our view alter the competitive environment in the industry by hindering new product development, putting up barriers to entry, and raising the overall cost of doing business.

Philip Morris USA, the largest U.S. tobacco manufacturer, has stated its support for the bill, while R.J. Reynolds and Lorillard, the second- and third-largest industry players, opposed it. Competitors have criticized Philip Morris, claiming that the sales, marketing, and advertising restrictions would help the company maintain its market share.

Despite the broad potential effects of the FDA regulations, we don't expect the bill's passage to have an immediate impact on our ratings and outlook on the largest-rated tobacco manufacturers or on tobacco settlement-backed securitizations (structured transactions secured by payments from participating manufacturers under the 1998 Master Settlement Agreement [MSA]). In addition, we don't expect to make changes to our current criteria assumptions for tobacco settlement-backed securitizations as a result of the legislation. Our ratings on all such securitizations currently have negative outlooks or are on CreditWatch negative, and we believe our existing assumptions adequately address the risks inherent in these transactions. . . .

We think the overall litigation risk in the tobacco industry will remain significant.

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S&P on FDA / Regs may pose risks to tobacco industry, change competitive landscape 

President Barack Obama's signing in mid-June of the Family Smoking Prevention & Tobacco Control Act giving the U.S. Food & Drug Administration (FDA) oversight of the U.S. tobacco industry is likely to have broad effects on the industry but no immediate rating impact on the largest-rated tobacco manufacturers or on tobacco settlement-backed securitizations, according to a recent report published by Standard & Poor's Ratings Services.

The act gives the FDA control over the manufacturing, labeling, marketing and sale tobacco products. (Click here for details and previous CSP Daily News coverage.)

"Although the new policies may, in our view, alter the competitive environment in the industry by hindering new product development, putting up barriers to entry and raising the overall cost of doing business, we don't expect the regulations to have an immediate rating impact on the rated tobacco manufacturers," said S&P's credit analyst Mark Salierno. . . .

"We believe that these manufacturers' strong cash flow generation, solid margins and respective market positions provide support to the current ratings and partly offset the risks associated with FDA regulation, in addition to ongoing litigation risk and contraction in the domestic cigarette industry," Salierno said. "However, our negative outlook on Lorillard reflects greater uncertainty about the impact FDA regulation may have on the menthol cigarette category, given the company's greater exposure and leading position in this category."

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Smoking Pays Dividends 

Tobacco companies have produced great returns for shareholders.

If you're looking for an investment that's resistant to economic downturns, pays a reasonably high income and has a track record of increasing dividends, you might fancy having a look at the tobacco sector.

Many investors will refuse to invest in tobacco companies on ethical grounds. That is a perfectly understandable position since their main product, cigarettes, if used as advertised will harm the health of the vast majority of its users. It is incontrovertible that regular smoking takes several years off a person's life expectancy and will be the primary cause of death for roughly half of all smokers. That's a more than adequate reason for any investor wanting to have nothing to do with tobacco.

But tobacco is a perfectly legal product and will remain so for the foreseeable future, if only because the nation's finances would be in an even more parlous state without the taxes that tobacco produces. So if you do not have an ethical objection to their business then tobacco companies are one investment that should definitely appear on your radar.

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Tobacco Company Stocks A Good Buy, Despite FDA Regulation 

Cars, alcohol and fatty foods also kill a lot of people every year, but Washington reserves its real wrath for cigarette makers. . . .

These laws may actually prove a net positive for tobacco stocks.

Why?

First, uncertainty surrounding the effects is keeping many shares cheap. Institutional investors in particular tend to shy away from stocks in these kinds of uncertain situations. As a result, tobacco stocks are languishing and dividend yields are hefty. Marlboro parent Altria yields 7.9%. Reynolds American stock yields about 9% - more, remarkably, than the bonds: Its 2016 bonds are yielding about 7.5% to maturity, the 2018 bonds, 8.3%.

Second, the new laws may help the big players by reducing independent competition. . . .

Third, while the new laws may spur some people to quit smoking, many people have been trying to quit anyway -- they have been for years. That trend hasn't hurt the industry because the companies' profits have rises faster than their volumes have fallen. . . .

Fourth, FDA regulation may actually help legitimize the industry - and further reduce the rapidly diminishing litigation risk. . . .

The riskiest stock in the pack is probably Lorillard, because nearly all its profits come from menthol brand Newport. . . .

Many people feel uncomfortable about the idea of investing in tobacco stocks and "profiting from smoking." But if you benefit from any government services you already are. Average state, local and federal taxes come to about $2.14 per pack. Big government and big tobacco are increasingly hard to distinguish. That, too, may reassure investors.

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FG Bans Fresh Investment in Tobacco  

The Federal Government may have banned fresh investments in the tobacco and allied industry. Smoking and the pervasive use of tobacco products is a risk factor for several diseases and has been increasing in many developing countries. In 2000, 4·83 million of premature deaths in the world were attributable to smoking with 2·41 million occuring in developing countries and 2·43 million in industrialised countries.

Executive Secretary and CEO of the Nigerian Investment Promotion Commission (NIPC), Mustafa Bello, made this disclosure at the just concluded 2nd Nigeria-Japan Business and Investment Forum, which took place in the cities of Osaka and Tokyo.

Bello, had in response to an inquiry from a prospective Japanese investor, said that the Federal Government in line with global efforts at stemming the use of tobacco products and isolating manufacturers of the product may not be well disposed to fresh investments in that sector.

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Smoking out profits from BAT shares 

For BAT-Kenya shareholders, however, smoke has meant one of the highest returns at the Nairobi Stock Exchange in the past one year, making a mockery of the bourse’s one-year bearish run.

The returns have been two-fold, in price appreciation and dividend pay-out. On January 21, for example, BAT shares were selling at Ksh137 ($1.75), but by June 24, the price had risen to Ksh170 ($2.2), an appreciation of Ksh43 (US 55 cents).

A shareholder who bought into the company on January 21 would, however, have made a bigger killing, given that BAT-Kenya paid a final dividend of Ksh12.50 (US 16 cents) on April 30.

Taken together, the price appreciation and dividend payout mean that the total gain per share for the investor would have been Ksh55.50 (US 71 cents) by last week, equivalent to a 41 per cent gain in investment in just four-and-a-half months. Globally, annual gains of around 10 per cent on capital are considered good.

The gains registered by the BAT stock far outstrip those made by the NSE over the last four weeks, when the bourse registered some recovery pressure.

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