10 Reasons CVS Will Stop Selling Cigarettes

This morning, the nation's second largest pharmacy chain, CVS Caremark, announced its decision to stop selling cigarettes by Oct. 1 of this year. Here are 10 reasons that likely encouraged it to do so.

Feb 5, 2014 at 6:30PM


Source: CVS Caremark.

While we've become desensitized to the facts about smoking, this one still surprised me: Even though smokers consume fewer cigarettes today than they did 50 years ago, their risk of developing lung cancer has gone up.

How could this be? According to a recent study published by the U.S. Surgeon General, "Changes in the design and composition of cigarettes since the 1950s have increased the risk of adenocarcinoma of the lung, the most common type of lung cancer."

When you take this into consideration, the decision by CVS Caremark (NYSE:CVS), announced this morning, that it will soon stop selling cigarettes in all of its 7,600 pharmacy stores across the country seems fitting -- for the record, the announcement has no bearing on e-cigarettes, which aren't currently sold by the chain.

"Ending the sale of cigarettes and tobacco products at CVS/pharmacy is the right thing for us to do for our customers and our company to help people on their path to better health," said Chief Executive Officer Larry Merlo. "Put simply, the sale of tobacco products is inconsistent with our purpose."

To be clear, this wasn't a nominal decision for CVS, as the company stands to lose an estimated $2 billion a year in forgone revenue. That would equate to a roughly 1.6%, or $0.17-per-share, decline compared to the last 12 months. In terms of the bottom line, moreover, it's expected to impact earnings per share by $0.06 to $0.09 in the current fiscal year -- though the company doesn't believe it will impact its five-year financial projections.  

At the same time, however, it's unquestionably consistent with CVS' position as the largest "integrated pharmacy health-care provider" in the United States. As the company's press release noted, "This decision more closely aligns the company with its patients, clients and health care providers to improve health outcomes while controlling costs and positions the company for continued growth." 

And along these same lines, it's also in line with the Surgeon General's recent findings about the health impacts of smoking, the 10 most significant of which are outlined below.

  1. Smoking has killed 10 times the number of Americans as the number of Americans who died in all of our nation's wars combined.
  2. More than 2.5 million people have died from diseases caused by exposure to secondhand smoke.
  3. Compared to people who have never smoked, smokers lose more than a decade of life.
  4. "The estimated economic costs attributable to smoking ... now approach $300 billion annually, with direct medical costs of at least $130 billion and productivity losses of more than $150 billion a year."
  5. If we continue on our current trajectory, 5.6 million children alive today who are younger than 18 years of age will die prematurely as a result of smoking.
  6. "Each day, more than 3,200 youth (younger than 18 years of age) smoke their first cigarette, and another 2,100 youth and young adults who are occasional smokers progress to become daily smokers."
  7. More than 42 million American adults suffer from tobacco dependence.
  8. During the last 50 years, tobacco has killed more than 20 million people prematurely.
  9. "More than 100,000 babies have died in the last 50 years from Sudden Infant Death Syndrome, complications from prematurity, complications from low birth weight, and other pregnancy problems resulting from parental smoking."
  10. "At least 70 of the chemicals in cigarette smoke are known carcinogens. Levels of some of these chemicals have increased as manufacturing processes have changed."

So, what does this mean for you?

Aside from the health issues it's addressing, the decision by CVS raises at least two questions for stock market investors. The first is whether CVS itself will ultimately benefit from the decision. By the looks of its share price today, it appears as if investors aren't optimistic, as its shares are down by 1.6% in midday trading.

The second question concerns the impact on cigarette makers -- most notably Reynolds American (NYSE:RAI) and Altria (NYSE:MO), two of the highest-yielding dividend stocks on the S&P 500. While a spokesman for Altria brushed off the move, saying that "It is up to retailers to decide if they are going to sell tobacco products," there's simply no doubt that it could be devastating if larger retailers like Wal-Mart follow suit.

Although it's true that drugstores and general retailers account for only a small slice of the cigarette market, no more than 16% according to The Wall Street Journal, the symbolic significance can't be denied. It's for this reason, in turn, that investors in companies like Reynolds and Altria would be wise to watch the developments on this front closely.

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