Makers of cigarettes and the U.S. government must play a bizarre game... and not one American in 100,000 understands it.
Everyone knows cigarettes are "evil." On Friday, the state of Kansas will ban smoking in indoor public places. And in San Francisco, they're close to banning smoking in many outdoor areas too. Now, 26 states ban smoking.
Not only are governments banning smoking, they are creating more public awareness about the dangers of smoking than ever before. I used to know dozens of smokers. Now, I'm hard-pressed to name a single one. And I never see kids smoking anymore. (An American teenager is more likely to smoke marijuana than tobacco these days.)
Then there's the litigation. Each year, tobacco companies pay out billions in compensation to society for the harm tobacco causes. Taxes hurt cigarette sales, too. Last year, the Federal government raised its excise duty on a pack of cigarettes by 62 cents. Fifteen states also raised taxes on cigarettes. In some states, total taxes per pack are more than $3.
Here's where it gets bizarre: Though the government pretends to despise tobacco, all those regulations, lawsuits, and taxes actually just entrench and enrich big tobacco companies.
The huge tax and legal liabilities cigarette manufacturers face become a barrier to entry in the industry. They stop smaller players from entering the market. So you can think of those giant tax bills and legal settlements as payoffs to politicians in return for doing business in a wildly profitable marketplace.
Altria (NYSE: MO, Stock Forum), the maker of Marlboro, is the star of the tobacco industry... and the best performing stock in American history. Altria makes around $25 billion in annual revenue. It gives half of this to the government in excise duties and still generates $3 billion a year in after-tax profits. All that cash makes it one of the greatest money-compounding vehicles of all time.
Right now, Altria yields around 7% in dividends. And if you reinvest the dividends, you get a "double compounding" effect. On the one hand, with reinvested dividends, your dividends pay dividends. On the other hand, the dividends Altria pays get bigger every year.
Take the period between 1992 and 2003 as an example. Altria's stock price went nowhere. But investors still doubled their money in the stock because Altria was paying a 5% dividend yield, and it raised its dividend 10 times in 12 years.
Altria's current 7% yield is near the highest dividend yield in its history. The company raised its dividend last month... Next year, it'll raise it again... probably by a similar amount. It'll raise it again the year after that, and the year after that. Altria has raised its dividend almost every year for the past 40 years and never cut it.
I'd be surprised if it ever gets cut. Altria pays so much money to the states that they have the most to lose from attacks on cigarette makers. The government is addicted to the money the industry pays in taxes.
Money talks... And no matter what kind of blather you hear from anti-cigarette politicians, you can bet Altria will keep selling millions of cigarettes every year for many years to come. That'll keep money rolling in to the government... and investors, too.