BERKO: We’re all tobacco addicts
Dear Mr. Berko:
I have $23,000 that I want to invest for income and growth. I asked my broker about the tobacco stocks, because they show pretty good yields. He told me the tobacco industry is going to be in the gutter in the next five years, because fewer people smoke today and the hundreds of billions of dollars in settlements the tobacco companies made with state governments will soon hurt them badly. The settlements don’t seem to affect their stock prices, dividends or profits. Do you think these are good stocks? If you do, which would you buy?
H.E., Akron, Ohio
The seemingly huge tobacco settlements (more than $200 billion paid to the states’ attorneys general) haven’t cost Big Tobacco (Altria, British American Tobacco, Lorillard, Philip Morris and Reynolds) more than a few farthings and a sixpence. Big Tobacco hired the slickest and most clever, creative and “snaky” lawyers a decade ago to ensure continued profitability and necessary stability of the tobacco industry. Like it or not, cigarettes are essential to the health of the economy; they’re vital to state government budgets and to millions of Americans who depend on tobacco sales and profits to earn their living.
So when the jury decided the tobacco industry was guilty as sin, Big Tobacco paid out billions – and increased the price of a pack of cigarettes. In the agreement, cobbled by the tobacco lawyers more than a dozen years ago, Big Tobacco got almost everything it wanted. The states agreed they would never sue Big Tobacco and tied the payments they receive to tobacco sales. So if tobacco sales decline, the states get less money, in effect putting the states in the tobacco business.
Remember 25 years ago, when a pack of cigarettes cost about 50 cents to 75 cents? Today, in many states, a pack goes for $7 to $9, which includes $1.01 in taxes for the federal government, plus taxes of $3 to $5.35 for every unit sold in states such as Washington and Connecticut.
The multibillion-dollar settlement with the states was pabulum for the anti-smoking lobby; it garnered millions for education programs, cancer research and related support groups. And if Big Tobacco’s sales fall, the states will see smaller revenues from tobacco taxes. Our states have unwittingly become addicted to tobacco and the survival of all those programs employing more than 110,000 Americans.
Americans fail to realize how significant tobacco taxes have become to their well-being.
Lightly populated Montana collected more than $85 million from cigarette taxes in 2010. New York City collected more than $1.5 billion, and the federal government was richer by more than $18 billion. In 2010, states, counties, cities and the federal government took in more than $200 billion in cigarette taxes. What a deal – and the smokers pay 100 percent of the costs of their transgressions.
In the past five years, Big Tobacco has increased revenues, earnings and dividends quite nicely, and company share prices have also done well. So I believe that Altria Group Inc.’s (MO-$30.46) $1.64 dividend yielding 5.4 percent, Lorillard Inc.’s (LO-$130.34) $6.20 dividend yielding 4.8 percent and Philip Morris International Inc.’s (PM-$84.62) $3.08 dividend yielding 3.6 percent represent above-average investments for revenue, earnings and dividend growth. Each of these companies generates a strong cash flow that enables them to maintain sizable payouts despite the challenges ahead. In spite of the negative factors that surround this industry (which I believe are discounted in their share prices), these companies have good cost management and effective pricing.
Go ahead and buy these three. I believe they will do as well in the coming few years as they have done in the past few years.