What Impact Will Self-Critical Ads Have On Tobacco Stocks?

The Tobacco industry has evolved dramatically over the last two decades. It is closely regulated by the U.S. Food and Drug Administration (FDA) as rising cases of cancer and heart diseases due to cigarette smoking is a serious concern. Smoking causes more than 480,000 deaths annually in the United States.

Amid this scenario, governments around the world have been imposing stringent restrictions on tobacco companies to lower cigarette consumption. Such restrictions have severely dented businesses of tobacco majors including Philip Morris International Inc. (NYSE:PM) , Altria Group Inc. (NYSE:MO) , British American Tobacco (LON:BATS) p.l.c. (NYSE:BTI) and Vector Group Ltd. (NYSE:VGR) .

In a recent move, Winston-Salem-based Reynolds American (NYSE:RAI), which is being acquired by British American, along with Richmond, Va-based Altria and other cigarette makers is set to put up self-critical advertisements on television and newspapers to dissuade customers from smoking per court orders.

Apart from this, the court wants tobacco companies to admit that cigarettes have been intentionally made addictive through the issuance of corrective ads starting Nov 26. Per the Wall Street Journal, the move comes in the wake of settling a 1999 lawsuit which accused the industry for several health hazards.

Notably since 2009, the FDA has been imposing restrictions on cigarette companies over selling and packaging. In July, the FDA urged tobacco makers to lower nicotine levels in cigarettes, as tar and other substances inhaled through smoking is detrimental to health.

Not only this, the FDA has made it mandatory for tobacco companies to use precautionary labels on cigarette packets to dissuade customers from smoking. The European Union and the FDA have proposed a ban on menthol in accordance with the Tobacco Control Act. Per the act, menthol has an adverse effect on health and thus should not be used in any product.

Recently, the state government in India's capital directed Philip Morris and other tobacco companies to remove all advertisements in the city, warning them of legal action if they do not comply.

Switch to Cigarette Alternatives

Amid increasing government restrictions and declining smoking rates, tobacco giants have introduced e-cigarettes and switched to less harmful ‘Reduced Risk Products’ to boost their business and mitigate loss. However, the FDA has imposed several restrictions on e-cigarettes as well.

The FDA made it mandatory for all tobacco makers to seek marketing authorization for any tobacco product introduced after Feb 15, 2007. The law was extended to include e-cigarettes, pipe tobacco, cigars and hookah. The FDA has currently deferred its reviews for products like cigars and hookah tobacco until 2021 and e-cigarettes until 2022.

Share Price Performance: Industry Versus S&P 500

Given the aforementioned turmoil, it is not at all surprising that the Zacks Tobacco industry is currently placed at the bottom 28% out of the 265 Zacks Classified Industries. The industry has slumped 7.5% in the last six months, against the S&P 500 market’s 8.4% growth.

Bottom Line

Stricter regulations have adversely impacted tobacco makers’ revenues. However, the FDA’s role to lower cigarette consumption is worth praising, keeping in view the rising deaths due to smoking. The latest initiative to provide statements against smoking is a significant step and is expected to have a great impact on consumers. Companies’ reduced focus on cigarettes and shift toward e-cigarettes is expected to reduce the rate of cigarette consumption in the long run.

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