Will Michael Bloomberg's Policies Topple the Domestic Tobacco Industry?

If you're a smoker, you know it's been a rough ride over the past two decades. Advocacy groups have been increasing awareness regarding the dangers of smoking since the early 1990s, and even more recently, both the Centers for Disease Control and Prevention and the Food and Drug Administration have been tag-teaming the tobacco industry to bring light to these dangers.

Last March, the CDC announced a $54 million, three-month graphic advertising campaign targeting TV, radio, print, billboard, and online viewers in the hope of getting 50,000 smokers to quit. Just weeks later, the FDA hit the tobacco industry with a request to be supplied with the quantities of 20 chemicals in cigarettes known to cause cancer, lung disease, and other health problems, including formaldehyde, carbon monoxide, and ammonia. The FDA plans to release its findings to the public next month in the hope that increased awareness will reduce the amount of active smokers.

Big Tobacco's big worry
Yet for all of these concerns, none may be more pressing for Big Tobacco companies such as Altria (NYSE: MO  ) , Lorillard (NYSE: LO  ) , and Reynolds American (NYSE: RAI  ) than what mayor Michael Bloomberg is doing in New York City.

In 2011, Mayor Bloomberg passed a ban outlawing smoking on New York City's beaches, public plazas, boardwalks, and parks. Since then, Bloomberg has taken numerous other supposed "vices" to the woodshed, including sugary drinks, which he banned in any amount greater than 16 ounces within the city, and Styrofoam trays, which were the latest item to fall under his legislative guillotine. Many of you are probably of the opinion that the actions of one little old mayor probably don't make a lot of difference ... until you see Bloomberg's track record according to Forbes.

In December 2006, a Bloomberg initiative went into effect that required restaurants to include calorie values on menus and menu boards. This was done to combat rising obesity within New York City, and not surprisingly, visible calorie values have become a norm throughout much of the country. Also in December 2006, a Bloomberg initiative to ban trans-fats within the city was passed by the Board of Health and gave restaurants 18 months to completely remove them from their foods. Lo and behold, not only did McDonald's (NYSE: MCD  ) stop using cooking oil that was trans-fat free in New York City by the deadline, but it had also stopped using trans-fat oils throughout North America.

To sum up: When Bloomberg takes action, the result is often much bigger than what occurs within the city of New York.

The question then becomes whether this is a major problem for domestic tobacco companies. I'm going to go out on a limb based on Bloomberg's previous track record and venture my best guess by saying "yes," that this has a chance to become a progressively tougher ban that could threaten to sweep to other cities.

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 announced that it'd be laying off 15% of its workforce in response to declining tobacco volumes. Reynolds American 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 (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.

Is this stock burned down to the butt?
Altria has been the best-performing stock of the past 50 years, but as the number of smokers in the U.S. continues to steadily decline, is Altria still a buy today? To find out whether everyone's love-to-hate dividend stock is a savvy investment choice or a hazard to your portfolio, simply click here now for access to The Motley Fool's new premium research report on the company.


Read/Post Comments (12) | Recommend This Article (3)

Comments from our Foolish Readers

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 March 09, 2013, at 1:11 PM, Phrontrowalpine wrote:

    So, decriminalization of C @ N N A B 1 S will spread from Bloomberg's policies hopefully too...

  • Report this Comment On March 09, 2013, at 1:18 PM, cityperson wrote:

    Sociaists and communist thinkers are taking things away, like Bloomberg and people can not put this togrether, untill one day the government rukes all. Think about this ahile New Yorkers. Liberlas can can not think, so it is up to the reats of you.

  • Report this Comment On March 09, 2013, at 1:35 PM, THEJonathanSwift wrote:

    If Michael Bloomberg succeeds in toppling the most prolific merchants of death, since literally the dawn of time, he should get at least a Nobel medal---and schools and statues built and erected in his honor, worldwide, as well.

  • Report this Comment On March 09, 2013, at 2:23 PM, Redsura wrote:

    After all these years, the FDA wants to know the "quantities of 20 chemicals known to cause cancer, including formaldehyde, carbon monoxide, and ammonia". Why not ask 30 or 40 years ago. Even 20 yrs ago. Could it be that there isn't too much money being made, for the rich and the government to remain in the game, now that there are not many smokers around? It would have been good for the public to know 30 yrs. ago, what exactly there was in cigarettes. So many lives would have been spared. Now the FDA wants to make it appear that they all care. You think people would have continued smoking if they knew? Some would have, but alot of them would have quit. Again, it's all about the money!!!

  • Report this Comment On March 09, 2013, at 2:26 PM, Redsura wrote:

    Now we want a nobel medal for the old man? Why didn't he act before, as he is as old as when the cigarettes started selling!

  • Report this Comment On March 09, 2013, at 5:06 PM, oldmec51 wrote:

    I am not a smoker, in fact I can't stand smokers but they have rights as do the companies and I believe the companies should come together and start a law suite to stop this over taxation and persecution of them which even I see as unconstitutional.

    They should make the courts tell the government to make all sales,production and use of tobacco illegal or stop unfairly continuously harassing and punishing the companies.

  • Report this Comment On March 09, 2013, at 5:50 PM, bugmenot wrote:

    The tobacco companies will start selling marijuana with the help of the liberal Democrats. Soda and cigarettes will be replaced by beer and drugs! Our kids won't be fat, they'll be stoned.

  • Report this Comment On March 09, 2013, at 5:56 PM, joycegreen59 wrote:

    Kinda funny,All these people who talk about smokers and people who choose to drink the sugary drinks,High calorie diets,ect.ect. They have all this control on the way so many people live their lives,However,The main stream in the industry is sitting the livng room of nearly every American home...Let's say they show there Commercials during shows such as Here comes Honey Boo Boo..How much influence do people think a show like that has over Pre-teen and younger..They almost 1 mil. Facebook friends and followers.. So, what does that tell ya??While there are so many Parents that are trying to teach our Children the difference between right and wrong,which seems to get harder and harder to do each year..The difference in diet and how to act in public,ect..A Channel that so many of us have been able to trust in the past called (The Learning Channel) Is now promoting a family that has a diet of Noodles soaked in Butter.. cooking with Lard..Ketchup sandwhiches...ect..Not to mention other bad habits that would make you sick to watch...YES,I do have the option to (turn the channel) And I do..But I do infact worry about all the children that are exposed to the so called (LEARNING CHANNEL)So,IMO there are people who are actually sitting in judgement of people who live this lifestyle while sitting back and laughing as this show and other shows like this Are airring and promoting them Instead of doing what they can to remove shows like this from the air! Maybe..Just maybe,They can get to the root of the problem and start there,Remembering that most people wait till commercials to run to the bathroom so they won't miss the shows that are airring or use that time to surf and then come back...So,Your commercials are just a little bit on the (I didn't see it side) JMHO...

  • Report this Comment On March 09, 2013, at 6:21 PM, Tadkins2013 wrote:

    Using a Bloomberg terminal causes its users to suffer from lower back pain, carpal tunnel syndrom, headaches due to eye strain, and obesity. Moreover, these health issues lead to sleeping disorders that cause a host of other problems. Therefore, it would be easy to make a case that continued use of a Bloomberg terminal causes just as many chronic health problems as smoking tobacco, drinking 16 ounce soda drinks, or listening to load music. Therefore, I believe Mr. Bloomberg should be consistent in how he tries to apply the law by restricing the use of his investment system to no more than 30 minutes per day.

  • Report this Comment On March 09, 2013, at 8:22 PM, timmywilburn wrote:

    the air we breathe is more harmfull to our bodies than smoking is. all the things companies and china put into the air is what is killing us all. the crap that is put into foods in a can is also killing us. the meds we get from doctors destory our liver and kidneys. bloomberg and all like him want us to live unhappy lives by going after all things we enjoy.also i smoke and have not missed one day of work in 15 years. when people say smokers cost companies lost time are very wrong. we never miss work. it seems all of these health freaks are the ones that cost a company lost time by being out of work sick and going to the doctor over a sneeze. also no man has the right to tell me what to drink,eat,smoke or if i should buy a certain product or not. nazi socialist liberalism is going to destory america unless the american patriots stand up and tell these dumba@@ people to stop stepping on our freedom of choice and saty the hell out of our lives.

  • Report this Comment On March 09, 2013, at 10:20 PM, mitstrebor wrote:

    I'm an American Indian, I do wish mr. bloomberg would come to Oklahoma and tell me i cant have my choice of anything, He will not live long!

  • Report this Comment On March 10, 2013, at 1:29 PM, mr091468 wrote:

    I wish the tobacco companies would give their employees and managments BIG bonuses and then shut the whole industry down thereby preventing this jerk in New York and the other Jerk in the white house from receiving ANY more tobacco tax income. Walk away tobacco guys. This whole economic system is broken and we pay attention to BLUMEIE and those 535 prostitutes in DC??

Add your comment.

DocumentId: 2303336, ~/Articles/ArticleHandler.aspx, 7/29/2014 1:19:14 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement