The trend is not your friend
Domestic cigarette sales have been in a steady decline for decades, as a National Health Interview survey demonstrates:
Source: Centers for Disease Control and Prevention.
Part of this trend can be attributed to better safety awareness regarding the effects of smoking on the body by the CDC, while the other half comes from aggressive state taxation aimed at taking a bite out of consumers’ pocketbooks if they choose to smoke. Not surprisingly, New York City leads all cities in the U.S. in terms of highest combined state and local taxation, at $5.85 per pack, followed closely by Chicago at $5.64 per pack and Evanston, Ill., at $5.48 per pack. Keep in mind that these figures exclude the $1.01 federal tax on tobacco packs, If these figures seem high, then Bloomberg gets even more fuel for his fire when estimates from the CDC for the overall costs of lost productivity and health-care costs on a per-pack basis came back at $10.47.
We’ve seen negative effects for years on domestic tobacco producers, which have countered with everything from share repurchases, higher prices, and bigger dividends to mask investors from the fact that their business model is deteriorating. In 2011, Altria Group Inc (NYSE:MO) announced that it’d be laying off 15% of its workforce in response to declining tobacco volumes. Reynolds American, Inc. (NYSE:RAI) followed shortly thereafter in March 2012 by announcing that it, too, would be shedding 10% of its workers to trim costs. Lorillard has been able to largely escape the layoff bug because of the sales balance between its premium Newport brand and its lower-margin, but strong-selling, discount brands. However, even it could become susceptible if Bloomberg’s smoking-ban initiatives prove to have a positive health and productivity benefit over time.
This leads to the next question: Is there a smart way to play the tobacco sector?
Think global if you want to play tobacco
The answer is yes, but it’s not by looking toward domestic players. Philip Morris International Inc. (NYSE:PM) gives tobacco investors a way to remain diversified, with its operations in 180 countries around the globe, while also allowing for plenty of burgeoning growth prospects. Both India and China are offering Philip Morris an unprecedented growth opportunity as more and more citizens in those countries are moving up into a middle-class status and are able to afford the luxury of being able to purchase cigarettes. In addition, Philip Morris’ risk of smoking sanctions is limited, with few of the 180 countries it operates in boasting smoking restrictions and taxes anywhere near as high as what’s seen in the United States.
It could be years before we really understand the effects of mayor Bloomberg’s public smoking bans, but I wouldn’t be surprised to see other major cities adopt similar bans in the not-too-distant future. Domestic tobacco makers may be running on borrowed time, and investors in these companies may want to think twice about their holdings over the long term.
The article Will Michael Bloomberg’s Policies Topple the Domestic Tobacco Industry? originally appeared on Fool.com and is written by Sean Williams.
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool owns shares of McDonald’s and Philip Morris International and recommends McDonald’s.
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