FDA-approved cigarettes, anyone? They sound almost as exciting as Soviet-era cars.
With last week’s House and Senate approval of the Family Smoking Prevention and Tobacco Control Act, it’s all over but the crying for U.S. tobacco companies, as the bill looks to become law shortly. The new legislation will allow the FDA to have a hand in tobacco product standards and advertising guidelines. Big Tobacco will also have to ante up to pay for the tighter regulation ($85 million up front and up to $700 million annually within 10 years, according to The New York Times).
As we’ve discussed before, Altria
Big Tobacco is looking out for you
You can’t say the tobacco companies (other than Altria) didn’t try to thwart this legislation. Take the advertisement that Lorillard
One reason for Lorillard’s concern is the potential for the FDA to eliminate menthol-flavored products, a move that would tear into the firm's Newport brand. The brand is the lifeblood of Lorillard’s business, making up more than 93% of the company’s 2008 sales. Although the legislation does allow such a move, the FDA is initially prohibited from banning menthol.
British American Tobacco
Burnt-out investment opportunities?
FDA regulation of the tobacco industry is only a small piece of the puzzle when it comes to forecasting the potential of tobacco stocks. To me, the growing cigarette tax on consumers is the biggest barrier for stock growth in this industry. With a pack of cigarettes costing $5 or more in some states, the price of smoking continues to increase in an economy where job losses are near the double digits and the future financial picture is uncertain at best. And cigarette taxes are proven to decrease cigarette use: In New York State, the number of smokers declined by 12% in one year after a near-doubling of state tobacco taxes.
Tobacco companies can’t complain that they’re being singled out for tax increases and government intervention. Possibilities for sin taxes abound in this struggling economy, with potential tax increases in the pipeline for brewers and spirit manufacturers, such as Boston Beer Company
Will that make sin stocks less attractive? Solid dividends, such as those from tobacco firms, can help investors stomach struggling sales for awhile, and those who are addicted probably don’t care how much cigarettes cost. With that said, however, these taxes do motivate people to cut back on their consumption and prevent younger folks from getting started in the first place.
We know that the true effects of regulation can be different from what is intended, so it will be interesting to see if Altria’s market leadership position gives it the competitive advantage that its competition believes it will gain with heightened government intervention. We’ve seen that FDA leadership hasn’t been a huge factor in drug approvals, but that doesn’t mean that FDA chief Margaret Hamburg’s past toughness on smoking won’t hurt the industry as well.
In any case, the combination of increased taxes and FDA regulation of tobacco products certainly won’t help the industry’s future growth prospects in the United States.
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Fool contributor Colleen Paulson does not hold positions in any of the stocks mentioned above and gives a shout out to Penguins fans from the City of Champions. The Fool’s disclosure policy never burns out.