Hooked on Tobacco

I had an e-mail exchange about tobacco stocks this past week and decided it was time to post on the subject. This posting will be about three subjects who are hooked on tobacco.

 

Tobacco smoking, notably cigarettes, are one of the most addictive products on the planet. People who use the product will give up women, food, money, life years and almost anything to get their fix. Tobacco owns them and it is not a pretty sight. But those who jump on the growers and producers of this legal product make me angry because it is a LEGAL product and will remain so. We tried prohibition of vices and it does not work and ends in black markets. Drugs, alcohol, food, and other vices are addictive as well. Frankly you show me a human being and I will show you someone who has a vice. The people who decide tobacco smoking is the most awful thing on earth are hypocrites. We have pushed tobacco smokers outside in the cold in the name of the awful smell and supposed second hand smoke problems, but at the same time society endures alcohol on the highway which is much deadlier. But be that as it may tobacco users are hooked.

 

Number two hooked on tobacco are the US states, the US federal government, and the trial bar.  This via the legal wonder called the Master Settlement for medicare losses attributed to tobacco smoking and the huge tax haul from selling tobacco. Let me put the situation in perspective with an update of Phillip Morris current budget for next year.  PM will have sales of around $68 billion next year, after accounting for cost of production and sales of around $11 billion PM has EBITDA of $57 billion.  $44 billion of that total is either excise tax, master settlement costs, and income tax or 77% of the total EBITDA goes to government or trial lawyers. Now you can call that what you will but readers with money like that coming your way government is hooked too.  Add in that three other tobacco companies, RAI, MO, and LO are all paying into that pot and you got even in government circles what would be called REAL MONEY.  Now if you really want to see hooked on tobacco try taking away some or all of that pot of money from the parties at the trough. Some years ago a trial judge tried to do just that by telling Altria that it needed to pony up about $15 billion dollars for an adverse trial settlement that was to be appealed. Altria told the then Republican Governor of Illinois that they did not have that kind of money and if forced to escrow the amount they would be forced into bankruptcy. Bankruptcy means no more master settlement and no more big tax haul. Many fellow US Governors called the Illinois Governor and told him to do something as they could not run states without the tobacco tax and master settlement revenue. Panicked at this situation the Illinois Governor called Democratic US Senator Dick Durbin and a then unknown Democratic Illinois State Senator name Barack Obama to go call on the fellow Democratic judge and explain the situation. They explained it like this to the judge. If you decide to carry through with your escrow order we will be forced to cut costs at the state level and one of those costs will be combining judicial districts in the state and one of those might be yours. Later that week the judge relented and allowed Altria to go forward for a few million or so which they won at the next level.

 

 Final note there are several smaller tobacco manufacturers who are not part of the master settlement. Those firms occasionally decide to move their low rent cig business into the higher rent master settlement companies business and take away market share. Last time one tried to do so Reynolds American the tobacco company losing market share picked up the phone and called the US Attorney General who immediately sent out a representative to discuss the situation with the smaller manufacturer who immediately decided they had all the business they needed without going into competition with Reynolds. Loved to have been in that room just as an observer.

 

Now you know why I think owning a tobacco company like MO, LO, PM, and RAI is like being in business with a government protected monopoly. I too am hooked on tobacco. Keep the dividends coming.

 

I currently own either as a long or option MO and LO.