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.
