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Big Tobacco Faces Another Huge Headwind

By Jim Royal - Updated Apr 6, 2017 at 8:33PM

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More packaging changes could dent these players' profits.

Increasing regulation is aimed straight at Big Tobacco companies, and not just in the United States. Investors want to be sure they're well aware of the coming changes and threats posed by government involvement in the sector.

Australia's government recently introduced a bill into its Parliament that would prevent tobacco companies such as Philip Morris International (NYSE: PM) and British American Tobacco (NYSE: BTI) from displaying their brand logos and colors on tobacco packaging. The bill would allow cigarettes to be sold only in plain green boxes with graphic health warnings taking up 75% of the package. The new rules would go into effect in May next year. According to an AP report, the bill is likely to pass.

Philip Morris and British American Tobacco have promised a big fight and are arguing that the move diminishes the value of their trademarks.

Similar rules are going into effect in the United States, a move that could hurt Altria (NYSE: MO), Reynolds American (NYSE: RAI), and Lorillard (NYSE: LO). The European Union is also considering comparable measures, according to a Bloomberg report. That would also be a blow to Philip Morris and British American. More than 1 billion people across 19 countries now are subject to laws requiring graphic tobacco labels.

With a population of around 23 million and a smoking rate of just 17%, Australia is probably more dangerous for Big Tobacco as a model of how anti-smoking policy could work effectively in other larger markets.  In contrast, the U.S. has a population of about 310 million and a smoking rate of around 20%, where it has remained for some years.

With regulatory pressure threatening their business, the industry has increasingly moved into oral smokeless tobacco as an alternative and more socially acceptable form of tobacco use, especially as workplace rules against smoking continue to proliferate. However, those smoking alternatives comprise a small percentage of the biggest names' revenue.  

Some of the largest players have even moved into smoking-cessation aids, such as with Reynolds' acquisition of Niconovum in 2009. And they could face innovation among smaller players. Upstart Star Scientific (Nasdaq: CIGX) is focused on non-traditional tobacco products, such as dissolvable tobacco, and is developing a process for curing tobacco that is non-carcinogenic. The small-cap company, however, has reported very little revenue over the last four quarters.

Given these ongoing regulatory developments, investors in tobacco need to keep an eye on these companies. Do you think it's time to buy tobacco stocks? Who's positioned the best?

Jim Royal, Ph.D., owns shares of Philip Morris. The Motley Fool owns shares of Philip Morris International and Altria. Motley Fool newsletter services have recommended buying shares of Philip Morris International and writing puts in Lorillard. Try any of our Foolish newsletter services free for 30 days. 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.

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Stocks Mentioned

Altria Group, Inc. Stock Quote
Altria Group, Inc.
MO
$44.22 (0.27%) $0.12
Philip Morris International Inc. Stock Quote
Philip Morris International Inc.
PM
$97.64 (0.04%) $0.04
Reynolds American Inc. Stock Quote
Reynolds American Inc.
RAI
Lorillard, LLC Stock Quote
Lorillard, LLC
LO.DL

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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