Tobacco is much in the news with the historic agreement between a group of 40 state attorneys-general and the major tobacco companies concerning a settlement over tobacco litigation. It might seem that tobacco has been so thoroughly demonized that tobacco stocks would be a sour investment, but in fact the agreement offers a number of reasons why tobacco stocks would be a good investment at this time.
The agreement will mean that the industry has to pay some $368.5 billion and will also be subjected to new rules to reduce the advertising possible for tobacco, to eliminate vending machines, and to tie the future of tobacco to a lowered rate for smoking by young people. The industry will also have to place blunter warnings on cigarette packages. The industry also must acknowledge the authority of government to regulate nicotine. The industry will also have to fund a massive anti-smoking campaign. The agreement still has to be accepted by Congress and the President, but if it goes into effect, it is certain to reduce the levels of smoking in the United States not only because of the advertising rules and anti-smoking efforts but because costs will be passed to the consumer. It is known that an increase in the price of cigarettes always leads to reduced levels of smoking (Weinstein and Levin A1).
All this might seem to reduce the desirability of buying tobacco stocks, and in the short term some of these restrictions might indeed reduce the value of those stocks. However, this represents a buying opportunity, for in the long run these rules will bolster tobacco as an industry. One reason for this is because an element in the deal eliminates the threat of litigation against tobacco in a number of venues. A close reading of the text also shows that while the government can regulate nicotine, doing so is not easy and requires meeting a heavy legal burden before doing so. The tobacco industry has been solidified in many ways so ...