Big tobacco is no stranger to litigation. The threat of lawsuits hangs constantly over the heads of major tobacco players. But now, determined to fight back, Philip Morris (NYSE: PM) and British American Tobacco Australia, a wholly owned subsidiary of British American Tobacco (NYSE: BTI), have decided to sit on the other side of the courtroom and are suing the Australian government over an aggressive plan to remove all logos from cigarette packs.
If the logo doesn't fit
The Australian plan, passed on November 10th, is the world's first plain-packaging law. Under the plan, logos, trademarks, colors, and graphics would be removed from all cigarette packages. They would instead be covered with health warnings and dramatic images illustrating the long-term effects of smoking. Packages would also be a drab olive green color, specifically chosen since research has shown it to be the least appealing to consumers. The law also comes with a 25% tobacco tax increase.
Restrictive packaging is nothing new for cigarette companies, though. The 2009 Family Smoking Prevention and Tobacco Control Act mandated that cigarettes sold in the U.S. must carry a warning label comprising 50% of the front and back of packages. This directly affects U.S.-centric cigarette companies like Altria (NYSE: MO), Reynolds American (NYSE: RAI), Lorillard (NYSE: LO), and Vector Group (NYSE: VGR). Yet these restrictions, as well as others by major nations like Columbia, have not gone as far as this recent Australian ban, which would entirely wipe company's logos from cartons.
Legal track record
Cigarette companies are claiming that the packaging restrictions violate international trademark and intellectual property laws, and are seeking billions in compensation. While typically on the losing side of legal battles, this may be a turning point. Major cigarette companies in the U.S. recently received a favorable ruling from U.S. District Judge Richard Leon. The case, which was their first legal challenge after 45 years of accepting packaging restrictions, was filed on free speech grounds. In Judge Leon's 29-page opinion, he expressed that he felt the images' graphic nature went beyond the simple conveyance of facts.
While it is still unclear which way the Australian case will fall, the two cases carry a striking resemblance. If the Australian court chooses to side with Philip Morris and British American, it could signal the point where big tobacco has reached their maximum regulation. Given that approximately 30% of Australians smoke, it would seem that tobacco companies are more likely to find sympathy there than anywhere else. But with the average smoking rate steadily declining on the continent since the 1950s, that expectation probably isn't reasonable.
A Fool's perspective
While a victory in Australia would be big news for these companies, I personally don't see any end in sight for the long-term creep of regulation, litigation, or taxes. If governments reach the point where they can no longer restrict the packaging cigarettes come in, they will still have tax increases or smoking bans in their arsenal.
I still recommend Philip Morris as the best way to play tobacco stocks and the industry's generally high dividends. They have the most opportunity ahead of them -- specifically in Latin America and Asia. But if all this litigation risk makes you queasy, you can also check out Star Scientific (Nasdaq: CIGX), whose smokeless products are generally immune from the tobacco industry's threats. Star Scientific does not pay a dividend, though.
To see how any of these companies manage their long-term threats, add them to My Watchlist. It's a free service offered by The Motley Fool to keep you current on all their relevant news and analysis. You can click the links below to add them.
- Add Vector Group to My Watchlist.
- Add Reynolds American to My Watchlist.
- Add Philip Morris International to My Watchlist.
- Add Altria Group to My Watchlist.
- Add Lorillard to My Watchlist.
- Add Star Scientific to My Watchlist.
- Add British American Tobacco to My Watchlist.
