Are Menthol Cigarettes Going to Be Outlawed?

Lorillard, Reynolds American, and Altria will lose out if menthols are banned.

Jun 25, 2014 at 6:00PM

Tobacco and the ethics surrounding it is a touchy subject. However, menthol tobacco products are even more controversial. 

Unfortunately, this is bad news for Altria (NYSE:MO), Reynolds American (NYSE:RAI), and Lorillard (NYSE:LO). These groups are committed to the cause of menthol, but the FDA is currently considering taking action against the product.

Plenty to loose
Lorillard stands to lose the most from any form of menthol regulation. Around 90% of Lorillard's sales are menthols, with the company's Newport brand being the top-selling menthol cigarette in the U.S. with nearly 38% of the market .

Meanwhile, menthol cigarettes account for around 20% of Marlboro-maker Altria's sales. Reynolds actually has several menthol brands, including Camel, Kool, and Salem brands, which account for about 30% of overall sales.

The argument
So why are menthol cigarettes such a touchy issue?

Menthol is found naturally in plants and removes much of the harshness of smoking, making smoking more palatable, easier to start, and harder to quit. For this reason, the Family Smoking Prevention and Tobacco Control Act of 2009 banned all flavored cigarettes—except menthol.

Now the FDA is currently considering whether or not to make a move on menthols. The agency believes that the removal of menthols from the marketplace would benefit public health within the U.S. The agency started its investigation last year, inviting comments from the public as well as tobacco companies and health agencies.

Under the Family Smoking Prevention and Tobacco Control Act, the FDA's Tobacco Products Scientific Advisory Committee has to submit a report to the agency for consultation before any action can be taken. This document has been received and the FDA is currently reviewing its contents. In addition, the FDA has received an industry perspective document on the public health impact of menthol cigarettes .

However, the Tobacco Control Act does not set a required deadline or timeline for the FDA to act. This means that it could be some time before the FDA publishes its recommendations. The agency has promised to update stakeholders during the second half of this year.

The race issue
There is also a strong argument that menthol producers are targeting African-American smokers, and this has ignited the race argument. Menthol cigarette use among African-American smokers has jumped from 69% to 85% over the past ten years. What's more, the proportion of black smokers who smoke menthol cigarettes is nearly three times that of white smokers.

It is claimed that the reason for this discrepancy is marketing. With this in mind, a group of present and former health secretaries, surgeon generals, and CDC directors called on the big three tobacco companies to stop selling menthols . Their argument is based on the fact that selling menthols cigarettes is affecting the health of the black community. They argue that if the majority of menthol smokers were white, the FDA would have banned the products years ago.

Foolish summary
It's not possible to guess what the FDA's ruling on this matter will be. However, there are some very powerful and respected figures arguing for the prohibition of menthol cigarettes.

If the FDA does go ahead and regulate menthols, Lorillard has the most to lose as around 90% of the company's sales are menthol products. Reynolds also stands to lose around 30% of sales, while Altria would only lose 20%. It would seem as if Altria is the least worried here, while Lorillard's investors need to keep an eye on how this menthol debate evolves. 

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Rupert Hargreaves owns shares of Altria Group. The Motley Fool has no position in any of the stocks mentioned. 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.

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