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• Super-Cheap Smokes ($$) 

ALTRIA GROUP IS VIEWED AS ONE OF THE country's most fearsome companies because of its willingness to use its political clout and legal muscle to maintain the dominance of its domestic cigarette brands.

Known on Wall Street as Big MO -- a reference to its ticker symbol, which harks back to its prior identity as Philip Morris and to its lengthy record of strong shareholder returns -- Altria lately has done little for investors. The Street is concerned that the company overpaid early this year for smokeless-tobacco maker UST, and that Marlboro, its top seller and the No. 1 cigarette ...

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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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• 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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• 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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• 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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• 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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• Tobacco companies can help reignite your portfolio  

We think the worst-case scenario for the industry under FDA regulation would be a reduction in the amount of nicotine, the addictive component of cigarettes, being forced upon manufacturers. However, it is likely that industry stakeholders would pressure the FDA not to implement such a measure. Just as smokers are addicted to tobacco companies' products, governments are addicted to the tax revenue the products generate. We estimate that total excise tax and MSA payments will be well in excess of $40 billion in 2009, or around 1% of all local, state, and federal taxes collected, and around two thirds of all excise tax receipts. In the case of the MSA payments to states, the states have in many cases already securitized that revenue and therefore are heavily reliant on the payments being made.

The risk of litigation still lingers over the domestic tobacco industry, although it has subsided significantly in the past few years. We expect financial penalties to arise periodically, but we think damages will be manageable.

We think the downward pressure on tobacco stocks over the past 18 months has presented investors with an opportunity to buy the industry leaders. We think Altria has the widest moat in the industry, with a vast distribution network and collection of strong brands. . . .

Although we think Lorillard's Newport is a very strong brand, the firm's exposure to the menthol category is a concern to us, given the threat hanging over that sector. We expect Reynolds American to underperform the industry because it has an older core customer demographic and we expect it to discontinue some of its peripheral brands.

Emerging economies such as Eastern Europe, Africa, and parts of Asia still offer growth opportunities. . . .

We think the best way to exploit the growth opportunities in international tobacco markets is with an investment in the industry leader, Philip Morris. The firm owns Marlboro in international markets, the only true global brand . . .

We rate British American Tobacco similarly to Philip Morris: Both have wide economic moats, both have only a medium uncertainty rating, and their dividend yields are also closely matched, BAT at 4.5% and Philip Morris at 4.9%.

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• No Doom: Industry's profits unlikely to suffer 

Analysts on both sides of the regulatory fence said that tighter regulation of the tobacco industry is not likely to produce a doom-and-gloom future for the industry.

But in the long term, they agree that the new regulatory standards passed yesterday by the U.S. Senate likely will cement Philip Morris USA's status at the top manufacturer, and that extra compliance costs will be passed on to smokers. . . .

"Given that today's tobacco products are grandfathered into the legislation, and tobacco products will continue to be sold in retail outlets, we do not expect any significant immediate effects on the sector," said Christopher Collins, an associate director at Fitch Ratings. . . .

R.J. Reynolds Tobacco Co. has had more than 10 years to consider the possibility that a bill like this would pass, spokeswoman Maura Payne said.

"Thus, we have spent considerable time analyzing how best we could comply with regulations like these, what we needed to do in our organization to prepare for compliance, and what we needed to do across all of our operating companies to ensure that all were successfully able to comply," she said.

Payne said that the rule-making process and establishment of the details surrounding the bill will take some time.

"We will participate to the degree that we are able to in that process, but, at the end of the day, we intend to continue to successfully compete for the business of adults who choose to use tobacco," she said.

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• Zacks Industry Outlook Highlights: Altria and Reynolds American 

Additional regulation of tobacco products by the U.S. Federal Government is now expected. . . .

The tobacco companies are losing product liability law suits. In late March 2006, the U.S. Supreme Court refused to hear an appeal in the Boeken case; therefore, Altria paid the $50 million judgment, despite claiming the judgment was excessive. Altria also lost the Bullock case; however, a new trial is scheduled to revise the amount of initial punitive damages of $28 million.

Lastly, in March 2009, Altria lost the Williams case when the U.S. Supreme Court dismissed the Altria's appeal . . .

As a result of these negative developments, the ratings on both domestic tobacco companies, Altria and Reynolds American, were lowered to a Sell.

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As a result of these negative developments, the ratings on both domestic tobacco companies, Altria and Reynolds American, were lowered to a Sell.
Zacks. When was the last time there was a sell rating on tobacco stocks?

• Health insurers invest in tobacco 

Canadian and U.S. health insurance companies – including Toronto's Sun Life Financial Inc. – have more than $3 billion (U.S.) invested in the tobacco industry, a letter published today in the New England Journal of Medicine charges.

By refusing to quit their addiction to cigarette profits, the insurers lose any moral right to help set health policy, the letter's Harvard University authors argue.

"Disgusting, depressing, I've heard a lot of words to describe the fact the insurance industry is invested in tobacco," says Dr. Wesley Boyd, the letter's lead author.

"By exposing their investments in tobacco, it pulls the rug out from under them in terms of saying they should be credible players (in health policy discussions)."

Boyd's research shows Sun Life, which markets life, health and disability insurance in Canada and the U.S., has more than $1 billion invested in tobacco firms, with nearly $890 million in Philip Morris USA, the maker of Marlboro cigarettes.

In an email response to the Star, a senior Sun Life official called the information cited in the journal "categorically incorrect" and said the company's "exposure to `tobacco' stocks" was less than 0.005 per cent of an investment portfolio worth "well over" $100 billion. "Notwithstanding the size, diversification and time horizon of our portfolio, Sun Life does not carry significant holdings in tobacco stocks," wrote Michel Leduc, vice-president of public and corporate affairs.

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• How Much Do Life Insurers Profit from Tobacco?  

some of the world's largest life-insurance companies still own billions of dollars in tobacco-industry stocks, Harvard physicians assert in a new report.

These latest findings, published this week in a letter to the New England Journal of Medicine (NEJM), suggest that several life and disability insurers, both in the U.S. and abroad, have yet to acquiesce to calls from the American Medical Association and others to divest their holdings in companies such as Reynolds American, Lorillard and Philip Morris. Many insurers cited in the letter say the study wildly overstates their investments, but the authors disagree. "Insurers continue to put their profits above people's health," said Dr. J. Wesley Boyd, the lead author of the report. "It's clear their top priority is making money, not safeguarding people's well-being."

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• FOES FUMING OVER CITY CIG INVESTMENT 

Despite Mayor Bloomberg's crusade against cigarettes, city pension funds remain heavily invested in Big Tobacco -- with more than 6 million shares, worth $103 million.

The $82.5 billion pension system owns 6,024,823 shares of Altria, formerly known as Philip Morris, according to an agenda for the company's stockholders meeting next month.

Critics fumed when told that mountains of taxpayer money are being invested in cigarettes, described as "accessories to murder" by the city's own health commissioner in 2006.

"I think it is absurd," City Councilman Tony Avella said. "Given the anti-smoking effort New York has launched, to invest in a company whose primary product is cigarettes is counterproductive." . . .

Four of the city's five pension funds list Altria or Philip Morris among their largest equity holdings in their 2008 annual reports.

The funds have debated tobacco holdings. About 10 years ago, NYCERS decided to stop pouring new money into the companies, but it never divested.

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• Watch Out Big Tobacco: The Next Big Story Stock Could Be Here 

Well, it does have a lot of potential. That is of course, if the World Health Organization (WHO), the FDA, Big Pharma, Big Tobacco, and a U.S. Senator don't get it completely outlawed.

Disrupting Smokers

I'm talking about the latest nicotine replacement therapy (NRT), electronic cigarettes, or e-cigarettes. . . .

If you go a bit further, it's easy to see how well these are selling. At the time of this writing, two out of three e-cigarettes at zerotar.net were sold out. Specialty Retailer magazine reports mall kiosks selling e-cigarettes generate about $50,000 in sales per month. There's not much data out there, but it's easy to see sales of e-cigarettes are soaring.

From a cost perspective, e-cigarettes are tough to beat. The initial start-up cost of around $100 for charger, battery, vaporizer, etc. The ongoing costs (buying more nicotine cartridges) are around 50 cents to $1 a day (to get the same amount of nicotine as one pack of cigarettes per day).

When you compare that to the cost of $150 to $250 per month (depending on which state you're in) though, it's easy to see e-cigarettes are a much cheaper alternative. As an alternative to gum, patches, sprays, lozenges, and inhalers, e-cigarettes are much cheaper as well. And from a health perspective…I think the answer is pretty clear.

From an investment perspective, this is the kind of "disruptive technology" which has changed the face of industry and created fortunes for early investors. Just think of a product, if successful, reaches just 10% of the 500 million+ smokers around the world. That's the kind of potential we're looking at here.

Best of all there is one publicly traded company leading the way in the e-cigarette revolution. More on that in moment. First, there's a big back story here with a lot of pitfalls. It's a complicated situation with politics set to play a big role in the near future. . . .

In the end, this is the perfect situation of how a new technology could revolutionize an entire industry.

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