Will the world's smoking habit be nipped in the cigarette butt?
Citigroup analysts think so. Global smoking rates are declining in a straight line, and these folks have extrapolated that if things keep going the same way, we could see zero smoking rates in some global markets by 2050. For example, in the U.K., smoking rates went from more than 50% in 1960s to 20% in 2010.
But, with the exception of menthol-puffing Lorillard
Zero smokers? Really?
OK, I like a provocative headline as much as the next girl, so I get how easy it is to tell folks that we could get to a smokeless world within 40 years. But that's just not going to happen. Yes, it is true that smoking rates have declined considerably since 1960, but that decline has pretty much flat-lined in the past five years, stabilizing at 21% for the United States.
In spite of skyrocketing cigarette costs, loyal consumers continue to partake. The question isn't whether people will smoke but rather which companies within the industry are positioned to succeed.
The Fool recently looked closely at Reynolds American
Now, the bad news...
Of course, investing in tobacco stocks doesn't come without some risk. With more than 90% of its sales tied up in menthol-based products, Lorillard does have a somewhat bleak outlook as the FDA considers the future of menthol cigarettes. When a company puts all of its eggs in one basket (e.g., Lorillard's Newport brand), then it is setting itself up for trouble no matter what the industry is, so it's tough to say that Lorillard's problems extend to the entire industry.
Then there's Vector Group
A fresh start in 2011?
The new year isn't just a time for us regular folks to make big changes; many of the big tobacco companies have announced coming changes in their executive teams and overall structures. Since tobacco isn't necessarily considered a growth market, strong management is a key to continued success.
To adjust to a changing global market and reduce management levels, British American Tobacco
FDA regulation of the tobacco industry has brought widespread fear (and hype) into the market, but things really haven't changed much yet. The FDA is particularly focused on warning labels, childhood prevention, and retailer education, and it isn't clear what, if any, effects this will have on lowering the smoking rate in America. As excise tax rates increase and laws continue to vary by state, the smoking rate has remained stable for the past five years, feeding into the theory that smoking is an inelastic habit for some.
The global market does look to continue its competitive nature, with British American recently looking into a bid for Colombian tobacco firm Protabaco. Excise taxes in some countries may be reaching their tipping point; Russia, for example, doesn't see much room to increase tobacco taxes. I'm sure these global folks are licking their chops for a chance to reach the Chinese market, with a smoking rate of 60% among men and tobacco companies that haven't raised prices in spite of excise tax increases.
No matter your view on "sin stocks," this industry provides stable yields to investors. Will tobacco stocks outperform the market in 2011? At this stage, other than the menthol debates for Lorillard, there doesn't look to be any major litigation or regulation change that would radically shake the market this year, giving investors the green light for growth in 2011.
Some related Foolishness:
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Fool contributor Colleen Paulson does not hold positions in any of the stocks mentioned in this article. Philip Morris International is a Motley Fool Global Gains pick. The Fool owns shares of Altria and Philip Morris International. For more investing strategies, take a look at the Motley Fool's newsletters via a 30-day free trial. The Fool has a disclosure policy.
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