< Return to Bears pageYou could get smoked investing in tobacco.
Investors should be on guard for a) higher excise taxes (which would further hurt volumes b) societal invective against cigarette use and c) increased regulation. US cigarette fundamentals remain uncertain and everything from class actions to legislative decisions remains a perennial risk. In 1950, half of the adult population was lighting up; today, less than 1 in 5 people smoke. Volumes overall are tumbling 3-4% and this trend is likely to continue. Today, fears of a potential menthol ban have weighed on valuations. LO also faces supplier/customer risk: 90% of its leafs come from one entity and a quarter of its sales volume centers around one distributor. LO has no exposure to the emerging market demand story for cigarettes, where new users and those trading up are helping international companies improve price/volume mixes. Moreover, as Merrill Lynch points out, NY state is at risk of excise tax hikes: LO gets 13% of its volume from that region alone. With the upcoming election, a sudden change in dividend tax treatment could bang up smoke stocks, which as we’ve noted, have a long history of handsome dividend payouts.
