Friday, June 10, 2016

Is Tobacco Good For You?

It's time to talk a little bit today about tobacco. No I'm not going to elaborate on why you should quit. But you should consider it anyway, especially if you like to stay fit! Every once in awhile you get an announcement from some government or organization about their big stand against BIG TOBACCO.

First is a recent announcement by European insurance company AXA that it will divest its stakes in tobacco firms.  For those that are unaware insurance companies take the premiums they receive and invest it generally in bonds and stocks. While a noble move for the company, their $1.8 billion dollars worth of holdings will immediately be snapped up by other investors searching for somewhere park cash.  If I were a shareholder in AXA I'd be asking where do they plan to reinvest since tobacco has been one of the best performing sectors since 2000. Just a note this chart doesn't even include the dividends so the performance is even better.  A lot of money will be left on the table if that out performance continues.

Next is the announcement out of the UK that they are joining a short but growing list of countries that will require companies to sell cigarettes in plain packaging. This one strikes me as the dangerous announcement. So if a court can hold that a companies image and packaging trademarks are subject to suppression by the government for health concerns then this is a major ground breaking precedent being set the last few years.

At the expense of sounding alarmist there is nothing that could stop this train from infringing upon this once protected and valuable asset with other industries.  The food and beverage industry comes to mind. I'd be willing to bet sugar and manufactured fats have killed just as many people as tobacco. yet no one has really stopped them the last 3 decades. The alcohol industry specifically should be on high alert. But I guess fortunately for them more politicians drink than smoke, and the industry employs more people.

I wonder how people would feel if their favorite sugar filled drink, or food had a picture of a grotesque looking fat person on it? Imagine a picture of gastric bypass surgery on a cereal box. Cereal is probably one of the worst food offenders. I can remember from my young days all the cereal commercials on TV. It was never ending. When I read the nutrition labels today I'm sometimes shocked at how much sugar is in there, let alone the fact my mother let me eat it. When I have kids I'll be sure to never let them eat that diabetes and obesity inducing garbage.

There are potentially plenty of companies with brand assets sitting on the balance sheet worth a lot less than we think today if this trend seeps its way into other industries.

OK back to tobacco.

Finally there was a recent FDA announcement stating they were taking oversight of the relatively new vapor/vaping segment. While this seems like a good idea on the surface it effectively handed the big tobacco companies another monopoly.  Basically no one can start a vaping company now without huge start up and regulatory compliance costs. I've seen compliance estimates for new vaping product applications costs at anywhere from .5-$3 million* with no guarantee of approval.  Not a lot of investors are willing to take that kind of risk. So we'll chalk this one up as bad for small business, but good for big business. But no worries we don't have a jobs problem in this country. In total this regulation is great news for all current vape products, and liquid nicotine suppliers.

So what's the point of all this? Well a lot of things.

First is that no matter what a large insurance company decides to do it shouldn't have an affect of what an individual decides with their own stock holdings. The same goes for when a "pundit" or "guru" makes a comment or portfolio change.  An individual must analyze their own holdings, whatever they are, and make sure they feel comfortable with the inherent risk of each holding. Tobacco, alcohol, and certain food and beverage companies operate with different risk profiles than say a clothing company or office supply retailer.

Second is that no matter what government decides an astute investor must consider the expected, and possible unexpected outcomes from new laws. While governments make plenty of boneheaded decisions, sometimes seemingly bad news for an industry ends up being the opposite, and vice-versa. A prudent investor must always be informed of laws affecting the industry they invest in.

In a future post we'll delve deep into the underbelly of The Big Sugar Business. Stay Tuned.

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