Big Tobacco Dodges a Bullet

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Big tobacco companies don't usually garner much sympathy, but it appears at least one person is acting in their favor. U.S. District Judge Richard Leon ruled to temporarily block the requirement of graphic images appearing on cigarettes, citing First Amendment rights.

Saving grace?
Cigarette companies includingLorillard (NYSE: LO  ) , Reynolds American (NYSE: RAI  ) , and Vector Group (NYSE: VGR  ) filed a suit defending against the requirement. This is their first legal challenge after 45 years of accepting the mandated medical warnings on their packages.

Judge Leon's stance is that the graphic nature of the labels goes beyond conveying facts and crosses the boundary into advocacy. He believes this violates the cigarette companies' free-speech rights. In his 29-page opinion on the matter, he wrote, "It is abundantly clear from viewing these images that the emotional response they were crafted to induce is calculated to provoke the viewer to quit, or never to start smoking -- an objective wholly apart from disseminating purely factual and uncontroversial information."

A smoky future
Judge Leon's ruling may provide a temporary breather for manufacturers, but it doesn't make the environment any more hospitable for them. Given the ever-escalating nature of smoking restrictions, though, I'm sure they're just glad it isn't getting worse, at least not yet.

The domestic market for cigarette manufacturers is becoming increasingly difficult as marketing restrictions, smoking bans, litigations, and excise taxes put downward pressure on the industry. It is threats like this that prompted Altria's (NYSE: MO  ) 2008 spinoff of Philip Morris International (NYSE: PM  ) , as the newly independent company would be better protected from U.S. lawsuits and regulations by focusing abroad. The industry pinch is beginning to be felt by the former parent, though, as Altria recently announced plans to lay off 15% of its workforce on declining domestic sales.

With many states still facing budgetary shortfalls, I wouldn't be surprised to see cigarette taxes tick upward in the future as a way for them to garner additional revenue. And with the overall domestic opinion of smoking declining, companies can probably expect continued regulation and litigation with little resistance going forward.

Given these market conditions, companies will probably have to increasingly rely on smokeless and low-tobacco products like those manufactured by Star Scientific (Nasdaq: CIGX  ) . Its ultra-low carcinogen products greatly reduce the toxins present in tobacco, skirt many industry restrictions like the indoor smoking ban, and have generally lower litigation risk.

Foolish takeaway
While cigarette companies are probably cheering Judge Leon, his ruling is a drop in the bucket and probably won't dramatically change the future of cigarette manufacturers. Many have written off high growth in this industry and are instead looking to the dividends, like the 6% one thrown off by Altria, as their most valuable portfolio contribution. Others think the smokeless-tobacco segment has a lot of room ahead of it and can still capture high growth. 

I think Big Tobacco can still be a rewarding investment. Dividend payouts remain high, and companies with an international focus have huge markets in front of them.

If you like the idea of dividends but are uncertain about big tobacco's future, I invite you to check out The Motley Fool's special free report "Secure Your Future With 11 Rock-Solid Dividend Stocks." Thousands of investors looking to land consistent income have already requested it. It's free!

Austin Smith owns no shares of the companies mentioned here. The Motley Fool owns shares of Altria Group and Philip Morris International. Motley Fool newsletter services have recommended buying shares of Philip Morris International and creating a bear put ladder position in Lorillard. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (4)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 08, 2011, at 1:21 AM, mansourg54 wrote:

    What fuels growth, profits and stock appreciation has been a subject of many analyses. MCD serves the same menu and its products (food & drinks) are subject to negative publicity but the share price keeps climbing and is heading towards 100. In March 2009 MO share price was around $15. Tody it is $27.5. KFT, KO, PEP, Hrsy etc are of the same category and their share price is also on the rise.

  • Report this Comment On November 08, 2011, at 10:21 AM, DividendsBoom wrote:

    What happened to jobs, jobs, jobs? I think everybody is in total and benevolent agreement as to the importance of these jobs. The US government needs to stop taxing and start subsidizing the tobacco market. Growing end-user demand will lead to increased hiring in production, logistics, and marketing, having a stimulative effect on the overall economy and leading us out of recession.

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