It’s Time to Stop Bogarting Cigarette Stocks

You know you have reached a certain level of immortality when your name becomes a verb, and I can think of no better example than the American actor Humphrey Bogart, perhaps best known for his role in that all-time classic Casablanca. "To Bogart" a cigarette is to leave it dangling sloppily in your mouth, even when speaking, rather than engaging in proper smoking etiquette by giving it a few puffs at a time and then removing it. Over the years, the word has also come to mean to greedily hog something. Today, I would say both meanings of the word are accurate descriptions of investors in tobacco stocks.

Investors are "Bogarting" cigarette stocks by continuing to hold them at current prices. First, a little disclosure is needed. I have been a major fan of sin stocks in general and cigarette stocks in particular for years (see "Not All Sin Stocks are Created Equal" and "Delightfully Sinful Dividend Stocks" as recent examples. But my enthusiasm for Big Tobacco rested on two big assumptions: They are largely despised by both individual and institutional investors due to their pariah status as politically incorrect merchants of death-making them perpetual contrarian value investments. They pay high and growing dividends that are significantly better than what can be found elsewhere among mainstream large-cap stocks.

Unfortunately, I cannot credibly say that either of these conditions still hold. Cigarette stocks have become downright trendy of late as investors have taken to chasing yield in a low-interest-rate world. Let's take a look at Philip Morris International (NYSE:$ PM) , the seller of the iconic Marlboro brand among many others. For years Philip Morris appeared to be the perfect stock. It had access to emerging market growth (roughly half its sales) while benefitting from an American listing and top-notch management. It also paid a dividend far higher than the norm among stable U.S. blue-chip stocks, and that dividend was growing every year.

There's one little problem here: Philip Morris International is still a tobacco company . Its sales may be enjoying a multi-year boost as emerging market smokers trade up from cheaper local competitors to premium Western cigarettes, but worldwide demand for their products is shrinking, and fast. In its most recent quarterly release, Philip Morris International saw its profits fall 6% on lower volume sales. And perhaps worse, the regulatory noose continues to be tightened. Consider Australia's new plain packaging law. All cigarette boxes for all brands now look identical in Australia. Cigarettes must now be sold in logo-free boxes featuring nothing more than graphic pictures of people dying of smoke-related illness.

It's hard to enjoy taking a drag on that cigarette when you're looking at a picture of a gangrenous foot on the package. This does not at all bode well for premium brands like Marlboro. Given that tobacco companies are all but prohibited from advertising, how can a premium brand differentiate itself from the cheaper competition when it sells its cigarettes in an identical box? Australia has adopted the most aggressively anti-tobacco regime in the world in taking this approach, but other countries are catching up in a hurry. Russia, the world's second-largest tobacco market after China, is starting to take tobacco's health risks seriously.

 Russian prime minister Dmitry Medvedev recently said that a ban on public smoking and cigarette advertising t were "just the beginning" of his efforts to stamp out cigarette smoking in his country. Several countries in Latin America have joined this bandwagon as well. Meanwhile, Philip Morris International's dividend yield, now 3.9%, is not the great selling point it used to be. It's lower than that of the 4.2% offered by blue chip semiconductor maker Intel (Nasdaq:$ INTC) and significantly lower than that of most telecom stocks, MLPs and REITs.

Volunteers clean up cigarette butts

Fifty-five volunteers showed up Saturday at Luke Jensen Sports Park in Hazel Dell and cleaned up a record 25 pounds of cigarette butts, organizers said. The cleanup was part of the national “Make a Difference Day,” and put on by the city of Vancouver, Clark County Public Works and Clark County Public Health. Saturday morning, the volunteers met in Hazel Dell and then went in groups to 10 parks throughout Vancouver and Clark County.

In addition to the 25 pounds of butts, volunteers also collected 12 bags of litter, said Karen Llewellyn, volunteer coordinator with Clark County Public Works. Member of the Sherwood Neighborhood Association also picked up 20 bags of garbage. Organizers were fearful that the rain would deter volunteers from coming out.

But Saturday’s event surpassed last year’s effort in terms of volunteers and pounds of cigarettes collected. Last year, the first year the county has organized a cigarette-butt cleanup, 50 volunteers picked up 15 pounds of butts, Llewellyn said. “Despite the weather, I was really impressed with our turnout,” she said.

Smoking apps promote cigarettes to kids, say researchers

Magic Smoke. Puff Puff Pass. iRoll Up. Smartphone smoking-simulation apps like these exist by the dozens in the iTunes Store and Android Market. Researchers at the University of Sydney have cataloged at least 107 apps that they say contain a pro-smoking message and can entice kids into thinking that smoking is cool. The researchers, whose work was published Oct. 22 in the journal Tobacco Control, say the apps — which have been downloaded millions of times — are a violation of the World Health Organization's ban on outdoor smoking advertisements.

In addition to apps that allow users to simulate smoking or to blow smoke rings, there are also apps that teach how to roll cigarettes or that act as games where a cigar or cigarette is passed around from friend to friend. One game, Puff Puff Pass, bills itself as "addictive gameplay, almost as addictive as smoking for real." As the researchers write in their paper, "Smartphones are ideal marketing targets as consumers can be reached anytime, anywhere."

The authors found that the smartphone app market lacks consistent regulation regarding what content can be sold to what age groups. Some of the smoking apps in the iTunes store are restricted for sale to people 17 years or older. At least one app, iSmoke with puff rings, is labeled for users over the age of 12 but does not appear to have any actual age-related downloading restrictions. The authors say these age restrictions are not present in the Android Market. Lead author Nasser F. Bin Dihm told AAP News, which is published by the American Academy of Pediatrics, that at least three of the apps carried ads for cigarettes sold by Philip Morris.

He said that most of the apps are published anonymously or under nicknames, so the companies behind them can't be easily traced. He called this "suspicious." Barbara Loken, a consumer psychologist at the University of Minnesota who was not involved with the study, told NPR that the apps "increase the involvement or engagement of the participant, even more than advertisements" and they can "normalize smoking" at a point when kids are determining their identities. At least one critic said the apps aren't the problem.

"If someone is enough of an idiot to download an app called 'Puff Puff Pass,' where the only point of the game is to smoke and pass along a cigarette, they are probably going to smoke either way — or already do," Charlie Osborne wrote for ZDNet's iGeneration blog. The authors of the new paper look at some country-specific laws and regulations that could be used to control what they call "harmful content" in other countries and suggest that app stores have a "legal responsibility" to make sure that they are complying with the World Health Organization's rules regarding tobacco advertising.

Imperial Tobacco Earnings Advance on Higher Cigarette Prices

Imperial Tobacco Group Plc (IMT), Europe’s second-biggest cigarette maker, reported higher operating profit as the maker of Davidoff cigarettes increased prices to combat declining shipments in Europe. Adjusted operating profit climbed to 3.16 billion pounds ($5.1 billion) in the 12 months ended Sept. 30 from 3.1 billion pounds a year earlier, the Bristol, England-based company said today.

That compares with the 3.19 billion average estimate of eight analysts surveyed by Bloomberg. The stock rose as much as 2.5 percent, the most since Sept. 20. “Some skeptics are likely to remain unconvinced by today’s results, but we believe that the company is making good progress,” Damian McNeela, an analyst at Panmure Gordon, said in a note to clients today.

Imperial Tobacco has debuted packs that flip open with one hand and flavored filters to goose demand and offset lower consumption in Spain, where a worsening in the economy led it to take a 1.2 billion-pound non-cash impairment charge. Price increases in the U.K., where Imperial is the market leader, also contributed to growth. Profit in the European Union rose 4 percent.

“The EU is tough,” Chief Executive Officer Alison Cooper said in an interview with Cantos. “But we’re growing.” The stock was up 1.4 percent at 2,364 pence at 9:36 a.m. in London. It has gained 5.1 percent over the past year, including reinvested dividends.

The Tobacco Industry’s Longstanding Desire to Sell Marijuana Cigarettes

In one of the last Newsweek magazine cover stories we will ever see, Tony Dukoupil offers a fascinating inside view of the business people who are making millions by selling quasi-legal marijuana. Exactly as predicted by yours truly, they are not long-haired hippies in tie-dye T-shirts but hard nosed, profit-focused, stylishly attired businessmen who make campaign contributions and try to squeeze out their smaller mom and pop business rivals.

Andrew Sullivan was one of many observers to pick up on the possibility that the tobacco industry will soon follow these early adopters into the pot business, bringing their ruthless, addiction-promoting tactics with them. Tony quotes my friend Dr. Peter Bourne as recalling tobacco industry executives discuss such things during the Carter Administration, but we needn’t rely on Peter’s memory when we have a smoking gun. I dug through the internal documents that the government forced big tobacco to release and found evidence of the industry’s longstanding interest in selling pot.

I gave one of the documents, a report commissioned in the 1970s by Brown and Williamson, to Mike Rosenwald of Washington Post, and here is how he wrote it up: This is the dream tobacco companies have had since at least the 1970s, when consultants issued a secret report to Brown & Williamson touting a future product line in marijuana. “The use of marijuana today by 13 million Americans is socially the equivalent of the use of alcohol by some 100 million Americans,” said the report, found among millions of documents turned over to plaintiffs during the tobacco lawsuits of the 1990s.

“It is the recreational drug; the choice of a significant minority of the population. The trend in liberalization of drug laws reflects the overall change in our value system. It also has important implications for the tobacco industry in terms of an alternative product line.” The tobacco companies, the report concluded, “have the land to grow it, the machines to roll it and package it, the distribution to market it. In fact, some firms have registered trademarks, which are taken directly from marijuana street jargon.

These trade names are used currently on little-known legal products, but could be switched if and when marijuana is legalized. Estimates indicate that the market in legalized marijuana might be as high as $10 billion annually. The report was a long time ago, and no doubt the industry has more modern ideas for selling marijuana today. Maybe that’s why, during the run up to the 2010 election in which marijuana legalization was on the ballot in California, Altria took control of the web domain names AltriaMarijuana.com and AltriaCannabis.com. For those not in the know, Altria is the parent company of Phillip Morris, the manufacturer of Marlboro, Players, Benson & Hedges and many other popular brands of tobacco cigarettes.

Missouri Voters Consider Tobacco Tax Increase

Could the third time be a charm for higher cigarette taxes in Missouri? Voters didn't like the idea in 2002 or 2006 but that could change now that the destinations for the funds are clearer. The money from the tax increase would go to schools and smoking cessation programs, but those against the proposition say they don't want Missouri to lose its status as the lowest tobacco tax state in the nation. The increase is in the hands of the voters. St. Louis resident Bob Moellman doesn't smoke but used to chew tobacco.

He's all for anything that will deter people from starting the habit. "I think it's gross watching some young kid do it, smoking, especially girls," explains Moellman. "To see a pretty young girl sucking on a cancer stick, it sucks." Proposition B would increase the tobacco tax from 17 cents a pack to 90 cents a pack. Most of that money would help with education and programs to help people stop smoking. But opponents of the proposition feel they are being picked on.

 "When we voted in the lottery, that's where the money was going. When they voted in the gambling boats, that's where the money was going," says Smoker's Outlet President Bob Ward. "There should be so much money for education that everything in school should be free." There are 15 Smoker's Outlet stores across the state of Missouri. Ward says his stores would still have a tax advantage over Illinois, but the rate would be similar to other neighboring states, making his shop less competitive with prices.

Ward says he also believes the state would lose out on more than $60 million in sales tax revenue a year if the tax goes through. "They are not only buying cigarettes, they are also buying gas, their lunch, grocery shopping, whatever it is they are doing in Missouri," says Ward. "It's a plus for Missouri to keep those people coming in the state." The state auditor's office predicts the tobacco tax increase will generate between $283 and $423 million every year.

Battle heats up over proposed 429% increase on cigarette taxes in Missouri

Many school districts across the state are calling for more taxes. “It's good for kids, it’s good for the health of the state,” said Nixa School District Superintendent Stephen Kleinsmith. Kleinsmith isn’t talking about a bond measure, but Proposition B. It’s the Missouri ballot initiative that, if approved, would raise the cigarette tax from 17 cents a pack to 90 cents. “I know Prop B would be a win for public schools and all kids in Missouri,” Kleinsmith said. The state auditor’s office estimates revenue generated from Prop B could total up to $420 -million a year. Eighty percnet would go for public schools, universities, and colleges.

Twenty percent would help fund smoking cessation programs. “It’s much needed. We are not getting fully funded and not even close for years,’ said Kleinsmith. Nixa says it could receive a $1.3 million share in the first year. The money would be used to pay for things like additional teachers, salary increases, and new textbooks. While Prop B may benefit schools, it would be a boon for tobacco users. “I agree with you, smoking is bad for you. It’s bad for the kids and everything,” said Wayne Ebersole. “But some of us already stuck on it, we are going to be paying for it.” Wayne wonders what will come next if Proposition B is approved by the voter.

“Cigarettes now; your food and your gas and everything down the line. They just want to keep raising taxes,” Eberole said. “I think it will be devastating to our economy,” said Al Livingston, operator of Discount Smokes in Nixa. The proposal calls for a 429-percent increase on all cigarette brands. However, generic brands would see a 760-percent increase. Roll-your-own type tobacco products would experience a 250-percent tax hike, while a 150-percent increase would be tacked onto other products such as cigars and smokeless tobacco.. “It is going to hurt. We may have survived, we may not. I just wish our politicians would speak out against it,” said Livingston. Smoke shops and gas stations are increasing their fight against the proposed tax increase.

The Missouri Petroleum Marketers and Convenience Store Association is bankrolling the campaign against Prop B. Its bright orange signs and billboards can be seen in front of many gas stations and tobacco retailers. “We will have at least a 50-percent decrease in our tobacco and cigarette sales,” Livingston said. While the estimated income from Prop B would be close to $420 million initially, the amount may not last long. That’s because the measure seeks to collect revenue while reducing the revenue source. According to the ballot language, 20 percent of the money generated would be used for smoking cessation programs.

Between that, and the price hike, supporters hope to discourage 73,000 Missourians from becoming, or continuing, to be smokers. Fewer packs purchased would mean fewer taxes coming in. The $420 million could be slashed to $283 million a year, with the amount dropping as more people kick the habit. Kleinsmith realizes that, even if Proposition B passes, his district may not be able to count on the revenue forever. “We wouldn’t depend on it but short term,’ said Kleinsmith. “That is money we hope goes down and down until it drops to zero because we need to get all youth in Missouri off of smoking cigarettes Julie Sally, a spokeswoman for Show Me a Brighter Future, said the $283 million is believed to be the amount that can be counted on after the number of smokers decline to meet the goal set.