The Motley Fool – By Chuck Saletta March 27, 2007
In November 1998, cigarette companies including what are now Reynolds American (NYSE: RAI) and Carolina Group (NYSE: CG) agreed to a settlement with 46 states. As part of that settlement, the companies agreed to pay somewhere in the neighborhood of $246 billion over 25 years.
Theoretically, that money was supposed to be used to pay restitution for the state-funded health-care costs of smokers and to discourage tobacco use among kids. In reality, as the map on this page shows, most of the states have diverted a large chunk of the revenue from that settlement to other purposes.
The real-world consequence of taking all those billions of dollars and spending them as general funds essentially means that the states became business partners of the tobacco companies. Not only that, but those states have the full coercive force of The Law at their disposal. That creates a Faustian bargain that essentially assures that smoking will remain legal and the tobacco companies profitable, no matter the true consequences. After all, the states need money, and a “sin tax” on smokers is far more politically palatable than an income tax on all potential voters.
With so many politicians’ careers relying on cigarette settlement payout revenues, it should be obvious that cigarette companies have been great investments. In fact, as this chart shows, cigarette companies — pretty much as an industry — have trounced the S&P 500 since the settlement was reached:
Beat S&P 500
Altria (NYSE: MO)
54.3 percentage points
British American Tobacco (NYSE: BTI)
252.2 percentage points
Vector Group (NYSE: VGR)
102.3 percentage points
Gallaher Group (NYSE: GLH)
278.2 percentage points
Unfortunately, we can’t transport ourselves to the past and buy cigarette companies at the time of the settlement. What we can do, however, is learn from that experience and understand how to profit from similar occurrences in the future. The right lesson, of course, is that most politicians are smart enough to not kill the goose that lays their golden egg. In other words, if an “obesity tax” against fast-food giants like McDonald’s (NYSE: MCD) ever passes, it’ll more or less help assure those companies’ successes for decades to come.
Profit from the ugly truth
Fortunately, this story does illustrate a more general investing principle that we can use to our advantage far more frequently. Simply put — bad news won’t necessarily sink a company. All politics aside, whether it’s earnings that came in below estimates or a major product recall, if a business will likely survive the blow, you will probably have a chance to profit. The time to buy, in fact, is often when things look their worst. After all, that’s when most ordinarily rational people have been scared out of a company’s stock, likely sending it down far below its true worth.
Christina Dean, SCMP – Mar 16, 2007
The anti-cigarette lobby argues that new measures aimed at safeguarding adults have ignored the next generation, writes Christina Dean
As the ash settles on Hong Kong’s tough new smoking laws, the anti-cigarette lobby is celebrating a hard-won victory in having the habit banned from indoor work and public areas as well as many outdoor areas. But amid the upheaval as the city’s smokers readjust to the clampdown on their pastime, there is one group that health experts say are neglected by policymakers.
Their focus has turned to teenage smokers, a group that will provide the next generation destined to battle against a disease that a University of Hong Kong study says kills more than 7,000 people each year in the city.
Evidence compiled by academics in Hong Kong reflects an alarming incidence of teenage smoking. Between the ages of 12 and 18, 11.5 per cent of boys and 7.6 per cent of girls are smoking in Hong Kong, according to a survey completed by the Department of Community Medicine at HKU in 2004. Of those in Forms 1 to 3, aged about 12 to 15, 10.4 per cent of boys and 6.9 per cent of girls have already taken up the habit.
The study questioned more than 36,000 students, aged mainly between 12 and 18, from 85 schools in Hong Kong, classifying them as smokers if they had smoked a cigarette in the past 30 days.
‘Young people smoke for two reasons,’ said Professor Lam Tai-hong, head of community medicine at HKU.
‘One, the tobacco industry is promoting the product in various ways and, two, because adults smoke. In mainland China you can have children as young as three or four years old who smoke because they are mimicking their parents.’
On the back of such comments, the anti-smoking lobby says one problem with Hong Kong’s new smoking legislation is that while it focuses on stamping out smoking in public areas, the laws fail to ban brand extension. This long-established practice enables cigarette manufacturers to advertise non-tobacco products, such as Marlboro Classics clothing, Camel watches or Salem Attitude shoes.
Anthony Hedley, chair professor of community medicine at HKU, said several studies, including tobacco industry research, showed that the public linked clothes and watches with the corresponding cigarette brand.
‘And this is responsible for childhood recruitment to nicotine addiction because they see cigarettes as being attractive, Professor Hedley said. ‘Not banning brand extension is about as antithetical as you could possibly get in the whole public health spirit of tobacco control. On this basis alone, this is a very tobacco-friendly government.’
Legislator Tommy Cheung Yu-yan, from the catering functional constituency, has been vocal in his opposition to the smoking ban introduced this year.
‘No, I don’t believe that brand extension has the effect of promoting smoking,’ he said. ‘I think there are definitely more parents and adults who smoke at home since the implementation of the smoking ban on January 1, 2007.
‘Moreover, the smoking incidence in Hong Kong in the past few years has remained around 14 per cent. I can’t see the public health message given through the recent smoking ban bill will cause the incidence rate [to go] lower.’
But Judith Mackay, a senior policy adviser to the World Health Organisation at the Chinese Academy of Preventative Medicine in Beijing and community medicine at HKU, said there was a definite need for more controls on youth smoking.
‘We are not very good at preventing children from smoking,’ Dr Mackay said. ‘To stop young people smoking we have to do three things. First, we have to put up the tax until it’s round their necks. This is definitely the best way. Second, we have to find out what kind of announcements of public interest [APIs] work that go out on TV that counter-advertise smoking. And third, we have to help 20-year-olds and young adults quit so that younger children are not always looking up to the next generation.’
A 1999 World Bank study, entitled ‘Curbing the Epidemic’, found a 10 per cent price increase in cigarettes reduced consumption by 4 per cent in high-income countries and 8 per cent in low-income countries. Youth smokers were two to three times more likely than any other smokers to quit or smoke less in response to price increases.
The World Bank and the WHO recommend that tobacco tax should account for between 66 per cent and 80 per cent of the retail price of cigarettes. ‘Our present duty on cigarettes is already accounting for some 57 per cent to 73 per cent of retail price for the majority of cigarettes selling in the market, which is not a low level compared to that in many
other jurisdictions,’ a spokesman for the Financial Services and the Treasury Bureau said.
‘Some cigarettes are sold at a higher price than others and hence their duty percentage would be less than those for popular brands.’ Hong Kong’s cigarettes are taxed at a flat rate of HK$16.08 per packet of 20 cigarettes, irrespective of the brand. Packets of 20 Winfield, More and Winner cost HK$22, Marlboro, Salem or Virginias costs HK$28 and Yves
Saint Laurent costs HK$34. This means that luxury brands are taxed at 47 per cent of their retail price, while Winfield and the like are taxed at 73 per cent.
‘However, the average tax proportion today, based on the most popular brands, like Marlboro at HK$28, is about 57 per cent,’ Professor Hedley said. ‘This is far too low and the Treasury can’t defend it on any grounds, least of all by saying that it is on a par with other countries. We need a big hike in the present tax to bring the sale price of a pack
back into the range of most other western jurisdictions which have similar gross domestic product.’
Professor Hedley argued that a rise in tobacco duty could help to fund public health interventions. It also could help to recoup some of the HK$5.3 billion that Hong Kong spent annually on tobacco-induced diseases, he said, quoting figures from a 2005 HKU study. ‘I firmly believe that the Hong Kong government refuses to raise tobacco tax because of a result of a cosy relationship between the government, namely the Treasury, and the tobacco companies,’ he said.
He is among a coalition of like-minded academics, advocates and legislators who have been lobbying the government to increase tobacco tax for more than two decades. Based on his calculations, if tobacco tax was increased by 20 per cent many lives would be saved.
‘We might expect approximately up to 12,000 teens to quit following such a modest increase,’ he said. ‘And because most regular adult smokers start before their 18th birthday and because 50 per cent of life-long smokers die from tobacco-induced disease, then this tax adjustment could save up to 6,000 lives.’
The Financial Services and the Treasury Bureau spokesman said the government reviewed the duty on tobacco products from time to time, having regard to the potential effect on tobacco consumption and illicit activity
relating to tobacco.
In recent years a succession of financial secretaries, Donald Tsang Yam-kuen included, had outlined the hazards of raising duty as it could promote smuggling, said Professor Hedley.
‘I believe that increasing tobacco duty will only enhance the attractiveness of contraband cigarettes and provide further impetus to smuggling and illegal sale,’ Mr Tsang said in a speech made in 1999.
Homer Tso Wei-kwok, chairman of the Hong Kong Council on Smoking and Health (Cosh), a government-funded advocacy group, said Hong Kong lacked the political willpower to raise tax on cigarettes. ‘Unfortunately, raising tax has nothing to do with what we say and it is definitely not evidence based. The government won’t listen to anyone,’ he said.
Another key issue for Dr Tso is the level of funding for health promotion. Cosh manages an average annual budget of HK$6 million from the government, part of it spent on producing APIs that counter-advertise smoking. The government earned HK$2.67 billion through the tobacco tax in 2006.
Amid the debate over youth smoking, a privately funded Hong Kong NGO, Action on Smoking and Health (Ash), is feeling the financial challenge of battling against youth nicotine addiction. ‘We’re disappointed with our level of funding,’ said Kwong Chi-kin, Ash chairman and a legislator in the labour functional constituency.
‘Hong Kong is a ridiculous society. The government is so rich. We’re not a third world society and we can afford more. But NGOs just can’t survive in Hong Kong as the general public don’t recognise teen smoking as a serious problem.’
While Ash is struggling with funding and says it may close within two years, another contentious anti-smoking NGO, called Youth Smoking and Prevention (YSP), is stacked with cash. It has received HK$25 million over the past four years – from the tobacco industry.
To improve its public image, the tobacco industry recently began funding YSP groups in more than half the countries in the world, according to The Tobacco Atlas, 2006, which was partly authored by Dr Mackay.
But YSPs are a thorny issue in the anti-tobacco lobby’s side. On the surface YSPs, and their dedicated staff, appear to be helping with community education efforts, but a 2003 WHO investigation found that the tobacco industry’s YSP programmes were ineffective. ‘No one should welcome the tobacco industry’s youth anti-smoking campaigns, a cynical attempt to make smoking seem more grown-up and even more appealing to youth,’ the WHO said of the programmes.
Mr Kwong said: ‘It’s quite unbelievable that the most active anti-smoking NGO group in Hong Kong is backed by the tobacco industry itself.’
The government has also been criticised recently for failing to provide sufficient smoking cessation programmes to deal with the aftermath of the ban.
A spokeswoman for the Hospital Authority, which runs 10 smoking cessation clinics in some of Hong Kong’s public hospitals, confirmed that the authority had not received additional resources since the smoking ban was implemented.
Sophia Chan Siu-chee, head of the Department of Nursing Studies at HKU said the government could do more to enact a comprehensive plan of smoking cessation services.
‘There’s been a vast increase in numbers calling the youth quit line since the ban in January,’ Dr Chan said.