Altria Group Inc (MO), Lorillard Inc. (LO): Can Big Tobacco Survive Additional Regulations?

Many investors choose not to invest in tobacco companies, for a variety of reasons. One of which is the constant threat of litigation and encroaching government regulation. Since tobacco is a product that is harmful to our health, the popular argument against tobacco stocks is that the government is always liable to implement punishing regulations that have the potential to cause material, long-lasting damage to the nation’s biggest tobacco companies.

Altria Group Inc (NYSE:MO)

In April, this threat was renewed yet again when the mayor of New York City, Michael Bloomberg, brought forth proposals to further restrict smoking in his city. Should tobacco investors rush for the exits on this news? Are Altria Group Inc (NYSE:MO), Reynolds American, Inc. (NYSE:RAI), and Lorillard Inc. (NYSE:LO) investors wise to dump their stocks now, so as to not be left holding the bag when the dust settles?

Beware the health-conscious consumer

It’s no secret that smoking is harmful. The public is widely aware of the damaging health effects of smoking, and as a result, health advocates such as Mayor Bloomberg have taken the offensive. His latest plan is to increase the legal smoking age from 18 to 21.

Previous efforts have been made to reduce smoking, particularly among young people, including banning tobacco companies from advertising and prohibiting smoking in public places in many metropolitan areas.

The fruits of these endeavors are evident. According to a Gallup poll taken last August, only one in five adults in the U.S. smokes, representing the lowest percentage since 1944.

These initiatives and the decline in smoking rates is having an undeniable effect on big tobacco. Reynolds American, Inc. (NYSE:RAI), maker of Camel, Pall Mall, and Natural American Spirit cigarettes recently reported quarterly revenue dropped 3% year over year.

Further, Reynolds American, Inc. (NYSE:RAI) has struggled over the last couple years. Revenue has declined for two years in a row, with full-year 2012 sales dropping almost 3%. Even worse, diluted earnings per share fell almost 7% in 2012 year-over-year.

Lorillard Inc. (NYSE:LO) is a much smaller competitor, with a market capitalization of $15 billion that has seen its share of difficulty lately. The company offers the Newport and Kent brands, and in February reported decent, if unspectacular, full-year 2012 results. Revenue and diluted earnings per share increased 2.4% and 5.6%, respectively.

Altria Group Inc (NYSE:MO), on the other hand, has performed admirably over the same period.  Plainly stated, Altria’s full-year 2012 results were simply better than the results of its closest peers. Altria Group Inc (NYSE:MO) reported full-year revenue increased 3.5% and revealed impressive diluted earnings per share growth of 25% versus the prior year.