Taking stock of your smoking habit -- Page 2
Those who had invested $1,000 in Philip Morris stock
in 1925 would be sitting on more than $250 million. Folks, we are
talking about a quarter of a billion dollars here! These incredible
facts are revealed in "The Future for Investors," a new
book by Jeremy Siegel, a professor at the Wharton School of the
University of Pennsylvania.
Under a cloud
This time frame includes the 1990s, a tumultuous period for tobacco
companies, when they were besieged by several hundred individual
and class-action lawsuits filed by smokers who suffered smoking-related
illnesses. The biggest settlement occurred in 1998, with $206 billion
promised to 46 state governments seeking to recoup health-care costs
caused by smoking.
Tobacco companies remain under a cloud, with more
than 270 lawsuits pending. In addition, there's a huge, ongoing
civil-racketeering case filed by the federal government in 1999
alleging that the industry deliberately hid the dangers of smoking
from the public and marketed their products to kids. An appeals
court recently threw out the $280 billion penalty in past profits
that the Department of Justice had sought from four tobacco companies
in connection with that case.
While this is a victory for the industry, other battles
loom ahead, including 20 class-action cases pending against Philip
Morris alone for deceptively marketing "light" cigarette
brands as less harmful than regular brands.
Ah yes, I remember those Marlboro Lights.
Despite the litigation, financial analysts remain
neutral or guardedly optimistic about the prospects of tobacco companies.
In a recent profile
on Morningstar.com, analyst Mark Hugh Sam said tobacco's addictive
properties make it less sensitive to price increases.
"For example, the 1998 master settlement agreement
with state attorneys general to cover the medical costs of smokers
now costs these firms almost $10 billion annually, but the tobacco
companies were able to raise net prices to offset the costs. ...
Even if the industry gets hit with another multibillion-dollar legal
challenge, we see evidence that these firms will have ample room
Reasons to quit
So the bottom line is, cigarettes may cost pennies to manufacture,
but built into the price of a pack or a carton is all the funding
tobacco firms need to square off with plaintiffs across the country.
If it looks like they'll need more funds, they'll just raise their
prices. They're counting on addicted smokers to pay for it. And
they'll make sure there's plenty of money left to pay generous dividends
to their shareholders. Dividends are a big reason why shareholders
have reaped such handsome profits over the years.
So why not just beat them at their own game and buy
Altria stock? Do you want to prey on the addictions of others? I
don't. I cannot in all good conscience recommend this course of
action. At least, not at current price levels.
Besides, we know how the stock performed before, but
we don't know how it will do in the future. Or, as Warren Buffett
wrote recently, investment trends are easy to spot "when one
looks through an always-clean, rear-view mirror. Unfortunately,
however, it's the windshield through which investors must peer,
and that glass is invariably fogged." In the case of Altria,
the company plans to spin off its Kraft Foods unit, which accounts
for a good portion of its revenues and profits. And demand for cigarettes
is decreasing at an annual rate of 2 percent to 4 percent, as more
smokers quit. So who knows? Maybe it won't do as well going forward.
I do recommend that you take the money that you would
daily spend on a pack of cigarettes -- let's say $3.50 -- and invest
it in a fund or a basket of stocks with good prospects. Select from
among those that pay high dividends. You'll save a lot of money,
not only on cigarettes, but on your future health-care costs, too.
In the table below, see how much a $105-a-month investment
(30 x $3.50, which reflects today's prices) can grow in investments
returning 4, 7, 10 and 12 percent over five, 10, 25 and 40 years.
|4 percent annualized return
|7 percent annualized return
|10 percent annualized return
|12 percent annualized return
Need another reason to quit? Here's one more: Refuse
to give your hard-earned money away to tobacco companies. You are
worth much more than they are!
Longtime financial journalist Barbara
Mlotek Whelehan earned a certificate of specialization in financial
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