CVS' Anti-Tobacco Move Comes at a Worrying Time for the Tobacco Industry

CVS Caremark's decision to stop selling tobacco products in its stores comes at a really bad time for cigarette companies such as Altria, Reynolds American, and Lorillard.

Feb 17, 2014 at 10:00AM

The announcement that CVS Caremark (NYSE:CVS) had decided to stop selling tobacco products in its stores took the market by storm and made headlines around the United States. There is no doubt that this was a huge decision for the company and it will change CVS' future. As of yet, it is unclear how this move will affect CVS in the long-term. Unfortunately, this move and the media hype surrounding the decision have come at a really bad time for cigarette companies such as Altria (NYSE:MO), Reynolds American (NYSE:RAI), and Lorillard (NYSE:LO)

Initial thoughts
At first glance it appears that CVS's decision will neither affect the company itself or big tobacco significantly. For example, CVS' management has predicted that this move will impact sales negatively to the tune of about $2 billion. On an earnings per share basis, CVS' management feels that EPS will only come in 2% lower than predicted for 2014 -- that's no game-changer. What's more, this move is unlikely to affect Lorillard, Reynolds, and Altria directly as large numbers of smokers are unlikely to stop buying cigarettes overnight just because CVS doesn't sell them anymore.

Indeed, when contacted by Bloomberg, Bill Phelps, speaking for Altria, did not seem fazed by the deal and stated:

We've appreciated working with CVS over the years, and we respect its decision...we will continue to focus on the nearly 250,000 retail stores with whom we work to sell tobacco products to adult consumers in a responsible way.

Having said that, there is actually more to this move than meets the eye and investors should not concentrate on its immediate short-term effects. In particular, this move comes at an interesting time for both the tobacco industry and CVS and one is likely to come off better than the other.

More than meets the eye
Removing tobacco from its stores, as covered above, will cost CVS, as mentioned above, $2 billion a year. Now, as far as I understand it, this figure only includes the direct loss from tobacco sales and excludes any knock-on effects. There is a serious risk that CVS could lose more than just tobacco sales because of this move. However, while CVS may lose sales because of its decision to remove tobacco from its shelves, it will gain customers from the Affordable Care Act.

The 2010 Patient Protection and Affordable Care Act, also known as Obamacare, brings health care to an additional 48 million uninsured individuals. According to some sources, this Act may result in a surge in prescription orders as patients who have minor ailments seek to avoid high emergency room costs and long waits for appointments -- great news for CVS. So, it may have been the perfect time for CVS to make this move after years of consideration.

More bad news for tobacco
Nevertheless, this move by CVS comes at a bad time for big tobacco. You may have noticed that CVS' decision got a lot of press coverage and this is likely to weigh on consumers' minds as big tobacco starts to run enforced advertisements which apologize to the American public for misleading them.

Specifically, the courts have ruled that Altria, Reynolds American, and Lorillard all must publish ads in the Sunday editions of 35 newspapers and on newspaper websites, and also buy prime-time advertising space on CBS, Disney-owned ABC, or Comcast-owned NBC five times per week for a year. In addition, all three companies concerned must publish 'corrective' statements on their websites and affix them to a certain number of cigarette packs, three times per year, for two years.

These advertisements, or corrective statements as they have been called, are damning and they have been described as:

"...shameful and humiliating..."

The statements are designed to make up for years of misleading information from these companies. Under the agreement, every statement should be prefaced by a statement that conveys to readers the fact that:

"...a federal court has concluded that the defendant deliberately deceived the American public..."

This statement must then be followed by one of a list of corrective statements approved by the court, including but not limited to:

"Philip Morris USA, R.J. Reynolds Tobacco, Lorillard, and Altria intentionally designed cigarettes to make them more addictive."

"There is no safe level of exposure to secondhand smoke."

"When you smoke, the nicotine actually changes the brain — that's why quitting is so hard."

These negative statements along with CVS' move lead me to believe that big tobacco may now be heading for a serious sales slump. Effectively, these tobacco companies are paying to tell consumers to stop using their products, while one of the nation's largest drug-store chains stops selling their products -- a double whammy of negative press.

Foolish summary
So in conclusion, the move by CVS to stop selling tobacco products within its stores is a drastic decision but it comes at a time when the pharmacy chain is likely to see a surge in prescription orders thanks to the Affordable Care Act. On the other hand, this move comes at a really bad time for big tobacco and only adds to the existing pile of bad press that the industry is struggling to grapple with.

Time to trust the market again?
Millions of Americans have waited on the sidelines since the market meltdown in 2008 and 2009, too scared to invest and put their money at further risk. Yet those who've stayed out of the market have missed out on huge gains and put their financial futures in jeopardy. In our brand-new special report, "Your Essential Guide to Start Investing Today," The Motley Fool's personal finance experts show you why investing is so important and what you need to do to get started. Click here to get your copy today -- it's absolutely free.

Rupert Hargreaves owns shares of Altria Group. The Motley Fool recommends Walt Disney. The Motley Fool owns shares of Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information