The question of whether or not to buy tobacco stocks has long posed an ethical dilemma for investors. Many American cities and states that have billions to disburse in pension funds, including Florida, decided in recent years not to invest in tobacco stocks as a matter of principle.
In 1997 the Sunshine State under Democratic Governor Lawson Chiles withdrew $900 million (€1,053 million) of pension funds invested in tobacco and took other punitive action against cigarette companies.
The tobacco industry retaliated. During the 1998 state election it gave Florida Republicans $227,250 to help Republican Jeb Bush win the governor's mansion, with Philip Morris, the maker of Marlboro, donating $125,000.
Last month Governor Bush decided to reinvest some of the state's $99 billion pension fund money in tobacco stocks, arguing that if Florida had done so all along the state would be $300 million richer.
Now the tobacco industry has received another boost, this time from Jeb's brother George W Bush. The pattern was the same. In 1999 the Clinton administration went after Big Tobacco. Attorney General Janet Reno accused the cigarette barons of "an intentional, co-ordinated campaign of fraud and deceit" as she initiated a racketeering and fraud action and sued for $20 billion in healthcare costs.
As in Florida, the tobacco industry retaliated the way it knows best, with cash. It contributed $7 billion to the Republican Party to help oust the Democrats from the White House. And sure enough it worked again. First the Bush administration slashed funding for the tobacco litigation team. Then two weeks ago Attorney General John Ashcroft, a major opponent of the Clinton-era action, who as a senator once railed for three hours in Congress against raising cigarette prices, moved to drop the case and negotiate a settlement.
What that meant was quickly made clear by the jubilant tobacco industry. "We are not willing to settle for any amount of money," said a spokesman for the third largest cigarette-maker, R J Reynolds. If it does it could be along the lines of a deal the four largest tobacco companies cut with 46 state governments three years ago to pay $206 billion towards smoking-related Medicaid costs. But no one is holding their breath in the new tobacco-friendly atmosphere in Washington.
The tobacco companies have already factored in the state's settlement by raising wholesale list prices by 80 per cent, leading incidentally to the creation of almost 100 small, privately-held companies in the US selling cheaper cigarettes under brand names like Patriot, made by a Pakistani immigrant in Texas, or Smokin' Joes, produced in a native American reservation in New York State. With a profit of $1.40 on every $3.50 pack of Marlboros, companies like Philip Morris, the world's biggest cigarette-maker, do not have to worry where the cash for any future deal will come from. Enough addicted smokers are staying loyal.
However, 1,490 legal actions are still pending against the industry in the US, posing long-term financial risks. The first smoker to collect damages from a tobacco firm had his victory confirmed in June when the US Supreme Court refused to hear an appeal from Brown & Williamson against an award of $750,000 to retired air-traffic controller Grady Carter. Mr Carter lost a lung to cancer after smoking Lucky Strikes for 40 years, having been induced to buy "an unreasonably dangerous and defective product". (The court handed tobacco a consolation prize by striking down state laws banning cigarette advertising near schools as an infringement on free speech.)
The most aggressive anti-tobacco state is California. Cigarette companies are appealing three major judgments against them in California for covering up the dangers of smoking, including a $3 billion award in June. They are also fighting a $145 billion verdict granted by a Miami jury in a state-wide class action case last year. Appeals could drag on for decades and the cases may not cost the industry much. Cigarette makers have won 18 of 21 jury trials since 1996 and no final verdict exceeded $1 million.
For investors without moral qualms, tobacco stocks are therefore very attractive. Philip Morris was the Dow Jones best performer last year, soaring 91 per cent and reporting a price/earnings ratio of just 13.26, while the S&P 500 dropped 10 per cent. R J Reynolds Tobacco has seen its share value more than double from a low of $25 last year to $56.
The anti-tobacco lobby, despite the Florida setback, is determined to fight the industry through the increasingly popular concept of socially responsible investing. This has been promoted since 1991 by the Domini Social Index of 400 firms which excludes corporations involved with sweatshops, weapons or tobacco.
It has outperformed the S&P for seven of the last 10 years, though last year it dropped 14 per cent to the S&P's 9 per cent.
A new social index of companies world-wide, FTSE4Good (www.ftse4good.com) based in London, will go live on July 31st aimed at big institutional investors. Yesterday it published a list of thousands of companies that it approves.
Tobacco firms are not among them. Nor is Florida likely to be doing its stock-picking based on its suggestions.
