Why do I always avoid investing in tobacco companies?

Just last week, British American Tobacco (BAT) announced that it would raise prices of its cigarette products by more than 20%, due to a more than 40% hike in cigarette excise duty. As of today, the increase in the cigarette excise duty has led JT International Bhd (JTI) and Philip Morris (M) Sdn Bhd (PM) to raise their cigarette prices as well, by as much as RM3.20 or 23.20% per pack of 20 sticks, according to The Edge Financial Daily.

Cigarettes are made up of tobacco and investigations revealed that there are more than 4,000 chemicals in it, whereby 51 of them are carcinogenic (something that causes cancer). Not only cancer, cigarettes leads to many other serious health problems as well and I believe these facts are not uncommon to you.

As a result, smoking is highly controlled by the government. How? by keep raising the prices to be the most effective way. Campaigns showing bad effects caused by smoking just won't work due to addictions. You may have noticed that cigarette prices will only go up, it will never go down, due to the government interventions. So why do I tend to walk away from tobacco companies?

Government Interventions

Excise Duties / taxes

The most effective way to stop smokers from buying cigarettes is to reduce the affordability. Levying a higher excise duty / tax will increase the costs of tobacco companies, forcing them to pass the burden to the end consumers so as to remain their profitability. In the long run, tobacco companies will find their sales growth to be somewhat limited, or even face downward pressures.

Advertising, promotions and sponsorships

Tobacco companies are prohibited by law from advertising, promoting and sponsoring any tobacco products. What a disadvantage! Advertisement is a means to reach potential customers so as to convert into sales. Not only that, it can create constant awareness of the products, which is crucial for repeated sales.

Packaging and labeling

Not putting any image of this because they are disgusting!

According to tobacco control laws, "Rotating combined picture and text health warnings are required to occupy 50 percent of the front and 60 percent of the back of the package. The text of the warning is in Malay on the front panel and English on the back panel. Health warnings are not required on tobacco products other than cigarettes. Misleading packaging and labeling, including terms such as “light” and “low tar” and other signs, is prohibited."

In a nutshell...

If the government takes the initiatives to stop people from smoking, the business is not gonna go very far. For me, this is what I called a wrong business model. You can argue all you want about addictions, but I opined that government certainly has a stronger power in affecting the sales of tobacco companies. On the flip side, I would love to invest in companies with favourable governmental supports like gloves.

To show you how strong government interventions are on tobacco products, you just need to recall did the government ask for your permission when they decided to implement a price hike or any other controls? No they didn't, because they have all the valid reasons to do so!

Imagine that if you have invested in a tobacco company, of course you would want the share price to go up. If so, sales and profits must increase. Indirectly, you hope for more people to smoke! Sounds wrong isn't it?

Finally, I wish all of you to not only say NO to tobacco companies, but also say NO to smoking!

If you wish to learn, in a more detailed manner, how do I analyze a company using my 5R Model and how do I calculate the intrinsic value of a company, please click here to get my Value Investing All-In-One eBook.

#smoking #cigarette #tobacco