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Investors Need to Keep an Eye Out for This Developing Trend

Big tobacco is used to threats from government policies, regulations, and taxes. So Philip Morris (NYSE: PM  ) and British American (NYSEMKT: BTI  ) , the world's largest two publicly traded tobacco companies, know how to handle regulators. 

However, the threat of plain packaging legislation has terrified these producers as they believe that selling cigarettes without their trademark branding would hit their sales hard.

The legislation would require tobacco companies to sell their products in drab green packs. In addition, at least 50% of each pack must be devoted to a graphic warning detailing  the risks of smoking.

So far, three countries have introduced plain packaging rules -- Australia, New Zealand, and Ireland -- although no one is really sure what effects the rules have had.

No clear measurement
Many mixed messages have been broadcast about the success of the plain packaging revolution.

For example, according to the Australian Bureau of Statistics, households consumed $3.2 billion in tobacco and cigarettes in the three months to the end of March 2014, almost $1 billion less than they did a decade earlier.

What's more, the ABS published figures which showed that 16.3% of Australian adults smoked daily in 2011-2012, down from 22.4% a decade earlier.

This data is completely different from the information released by tobacco companies. However, due to the reputation of big tobacco, many are just ignoring their data .

British American and Philip Morris reported figures that show that their cigarette sales within Australia increased by 59 million cigarette equivalents between them during 2013, the first rise in five years.

There is no way to tell which party is correct, but for investors this is an important point. Proof that plain packaging does significantly reduce smoking rates could lead to more countries around the world bringing in this legislation. This would hit both Philip Morris and British American extremely hard.

Looking for evidence
So are there any figures that suggest that plain packaging is having an effect? Well, Phillip Morris does not provide regional detail for its Asia cigarette volumes. Nevertheless, during the first quarter the company commented that :

...PMI's cigarette shipment volume [to Asia] of 70.8 billion units decreased by 2.5%, due primarily to: a lower market share in Australia and Indonesia...

During 2013 management did state that market share within Australia had increased. There is very little information available on the topic.

On the other hand, British American did provide some information on its business performance within Australia last year, the first year of plain packaging enforcement.

The company commented that the Asia Pacific region as a whole reported profit growth, at adjusted exchange rates of 7%, as a result of strong performances in Australia, New Zealand, Pakistan, Bangladesh, and Taiwan. Unfortunately, the company then went on to comment that :

...[Australia] Profit was up strongly as a result of higher pricing and cost saving initiatives, partially offset by lower volume. Illicit trade increased following the introduction of plain packaging. Market share was lower...

It would appear that there are some indicators that plain packaging is affecting sales. However, plain packing is not yet affecting the bottom lines of Philip Morris and British American.

Foolish summary
Overall, tobacco investors need to keep an eye out for developments in the plain packaging debate. While the initial figures are mixed, there is concern that the widespread roll-out of plain packaging could hit tobacco companies hard. For investors, this will likely translate into lower dividend payouts and share prices. 

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Rupert Hargreaves

Rupert has been writing for the Motley Fool since December 2012. He primarily covers tobacco and resource companies with a passion for value-oriented investments. .

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