Coughing Up Blood Money: The Altria Earnings Protection Act?

As I mentioned a few posts back, Altria, the sanitized name for Philip Morris, is the major player in the U.S. tobacco industry. The company spent $12.9 million on lobbying in 2006. And yet they fully support the upcoming bill that gives the FDA control over tobacco, the Family Smoking Prevention and Tobacco Control Act. All the other big tobacco companies – Reynolds American, Lorillard — oppose the legislation. Why is Altria so supportive?

According to Eoin Gleeson, writing in MoneyWeek:

[B]ecause the firm has read the small print. “This legislation might as well be dubbed the Altria Earnings Protection Act,” says Fortune magazine. For starters, the bill prevents the US Food and Drug Administration (FDA) from ever banning cigarettes. But just as importantly, the wording makes it extremely unlikely that the FDA will ever approve a new cigarette product because the entrant would have to be deemed “appropriate for the protection of the public health”. So the bill basically featherbeds the dominant tobacco groups’ [Altria’s] share of the market.

Altria’s spokesman, David Sylvia, explains the company’s support for the legislation as follows: “[F]rom a pure business standpoint, it will bring predictability to regulation over the tobacco industry.”

The non-Altria segment of the tobacco industry objects to the cost of FDA regulation, which will be funded by the tobacco companies in proportion to their market share. Michael W. Robinson, a spokesman for Lorillard: “The F.D.A. office would cost $6 billion over 10 years in hopes of reducing smoking by 2 percent, a use of government resources that some might see as inefficient.”

Sin taxes, such as those for smoking, are notably inefficient. Here’s Gleeson’s comment on why a Democratic Congress is going easy on the tobacco industry:

Because they know what every tax-hungry government knows – you can tax the hell out of cigarettes and people won’t stop smoking. The Irish government, for example, worked out that lifting the price of a pack by 30% only led to a 1% fall in smoking. They’ve exploited that fact to take in 53% more revenue from tobacco tax over the last decade.

Vice stocks make good investments, however.

Vice stocks – those related to tobacco and gambling, among others – have beaten the S&P by an average of 12% over the past six recessions, say Merrill Lynch analysts. The high dividends that American tobacco groups pay look very solid this time too. With Congress likely to pass the tobacco bill in the coming months, investors will have a solid line of earnings to tap into. The more ethically-minded can take comfort from the fact that Obama will have funds to address the problem of more than 400,000 people dying of smoking-related diseases in America each year.