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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.

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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, 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 to maneuver."

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.

  5 years 10 years 25 years 40 years
4 percent annualized return $6,961 $15,461 $53,984 $124,106
7 percent annualized return $7,517 $18,174 $85,058 $275,605
10 percent annualized return $8,131 $21,509 $139,318 $664,028
12 percent annualized return $8,575 $24,154 $197,279 $1,235,301

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 planning.

If you have a comment or suggestion, write to Boomer Bucks. If you have a particular financial problem that you would like addressed, please send your queries to Dr. Don, Tax Talk, the Real Estate Adviser or the Debt Adviser.

-- Posted: May 18, 2005




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