Tuesday, 10 January 2012
The cost of our habits
By Ardeshir Ommani
Altria Group is the leading cigarette maker in the United States. The stock of the company rose 20% in 2011's depressed markets and it's up 50% over the past two years, nearly four times the market's average gain. About two weeks ago, the stock of the company, which is the parent of Philip Morris USA and that of the Marlboro brand hit a 52-week high of $36.40.
The rise in its stock price is influenced by the company's stable cash flow and a dividend yield of 5.5%. At the time when money market rates are less than 0.5%, and the 10-year Treasury is
yielding less than 2%, the stocks of Altria Group attracts all the attention of the investors who do not ask how many smokers would die this year because of addiction and succumbing to lung cancer. It is worth noting that on December 23, 2011, from Richmond, Virginia, Altria's operating companies launched "Citizens for Tobacco Rights", a nation-wide website to assist the tobacco companies in promoting lowering taxes on cigarette sales.
Although US cigarette sales have been in a severe long-term decline, to be exact, its shipments dropped by a third over the past 10 years, the industry has been able to offset the volume decline with increases in wholesale prices. Naturally after addicting a large segment of the youth around the world, the owners of Altria Corporation are led to raise the cost of their habits and suffering.
The companies have raised cigarette prices by nearly 35% over the past 10 years, even as smokers shouldered huge jumps in federal and state cigarette taxes. Altogether retail prices and additional taxes hiked the cost of a pack to $5.95. This was more than double the rise in overall consumer prices.
This shows that the high rates of profitability in addictive substances is the ideal method of exploiting not only the workers, but also the consumers. The change in the demographics of cigarette addicts has forced the industry to intensify the rate of exploitation of those who can least afford the habit in a long period of economic stress and high rates of unemployment.
The captains of the stock market seem unshaken. The stocks look rich based on their double-digit price per earning ratios. The high rates of profitability in the industry have led the management to implement the strategy of stock buybacks and huge stock awards for management compensation.
Altria is by far the biggest US cigarette maker in both market weight ($61 billion ) and revenue-wise (over $16 billion a year). A substantial share of the company profits are generated outside the US. Philip Morris International, a subsidiary of Altria, sells Philip Morris brand lineups in about 180 countries around the world.
In other words, the men, women and more frequently, elementary-aged children - often at the cost of their lives - are providing these gentlemen in New York and Chicago with lavish life-styles. (Looking at just a few of the advertisements in major corporate newspapers as the Financial Times, New York Times, The Telegraph, etc. directed at this wealthy 1%, we see a woman's handbag selling for $4,000).
In 2009, Altria purchased the smokeless-tobacco producer UST, which makes Copenhagen and Skoal brands at the cost of $11.7 billion. The reason Altria shouldered such a high cost price is that smokeless tobacco is a much-less regulated part of the worldwide cigarette market. Lack of regulations leaves the smokers at the mercy of the tobacco industry. Altria generates in an average $3.5 billion a year in cash flow, most of which ends in the investor's bank accounts in the form of dividends and interests and conspicuous consumption.
As a group, cigarette smokers have lower household incomes than non-smokers and are nearly twice as likely to be unemployed, says a financial officer of Morgan Stanley, a banking corporation. Studies have shown that in communities with higher economic status, its members send their children to better-financed public schools and private universities where environmental sciences and healthier life-styles are emphasized in the educational curriculum from early grade school through university level.
Anti-smoking campaigns partially financed by higher city and state budgets are more predominant on expensive billboards in these higher income communities.
On average a member of this lower economic class spends more than $2,000 annually, smoking a pack a day, the amount that could be allocated towards the present and future sustenance. Smokers, in their attempts to halt casting a large amount of money to the rich, many have traded down to either cheaper cigarettes or bulk tobacco for rolling their own cigarettes.
For this reason, shipments of roll-your-own and pipe tobacco jumped 30% in the first half of 2011. In the brave new world, particularly the Facebook generation age 21 through 29 is no longer fascinated with that rugged cowboy who was for many decades the symbol of Marlboro.
Alongside Altria in the tobacco market stand such giants as Reynolds American, maker of Camel and Pall Mall as well as Natural Spirit brands selling the ugly and more hazardous chewing tobacco brands. To entice new smokers or keep the old ones in the loop, the cigarette companies constantly hatch out new names with new packets. Recently, Philip Morris USA came up with what it calls the "Marlboro Leadership Program" which puts a price cap on what the retailers can charge for a pack of Marlboro in return for promotional incentives, such as a free pack for every carton sold.
While in the US, after years of public pressure, the federal and state governments have imposed some restrictions on advertising and marketing tobacco products, the same companies in the markets of the developing countries promote and glamorize smoking among school children, going so far as to distribute free packs of cigarettes along the pathways leading to schools, the way they did just a few decades ago in the run-down parts of the big cities and the depressed small towns across the US.
Also, the ruling classes of the countries whose economies are dependent on the US and its partners benefit from such relations through providing lucrative markets for the tobacco products of the major international cigarette producers.
It is telling that the gains posted by these tobacco companies in 2011 was skyrocketing when few other stocks were thriving last year. A group of mutual fund managers who tried to avoid negative performance by the end of the year resorted to placing the shares of several tobacco firms among their top holdings.
Gains of more than 20% among the addiction enablers helped these funds outperform their rivals and attracted the moderate savings and the retirement funds of the employed and retired working class. Such is the political economy of the habit-forming industry, addiction of the oppressed and higher rates of profitability.
Ardeshir Ommani is a writer on issues of war, peace, US foreign policy and economic issues. He has two Masters Degrees in the fields of Political Economy and Mathematics Education.