Big tobacco’s big profits
Why are tobacco companies’ profits still booming – despite government regulation and declining smoking rates?
Smoking kills. So if you’re in an industry where your product is known to be damaging the health of people who buy it, then you should, in theory, go out of business.
But shares in companies listed in the Bloomberg tobacco producers index have risen 351 percent since 2009, making it one of the best investments of the past decade.
Graphic warning labels and taxes seem to have some effect on reducing the number of smokers but less so on industry profits which keep rising. And investors can’t quit buying the stocks because operating profits continue to go up.
Although some pension funds and life insurers have turned their back on the sector, it’s still not enough to hit big tobacco where it hurts.
Different tax regimes around the world mostly account for the difference in price of cigarettes. But governments are not as hooked as the consumers who buy cigarettes. Consumers cough up for higher prices because they crave the drug in tobacco – nicotine. Without nicotine addiction, there would be no tobacco industry.
The tobacco industry knows this and has diversified to develop other nicotine products like E-cigarettes. The electronic cigarette market has grown from just $50m in 2005 to an estimated $7.5bn last year, according to Euromonitor. It’s all part of the unique economy of addiction.
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New evidence suggests the dangers of cigarettes in the United States have increased despite the fall of smoking rates in recent years. A new study has found that so-called “light” cigarettes may be behind a spike in lung cancer cases, as Heidi Zhou-Castro reports.
Jeremias Paul from the World Health Organization joins Counting the Cost from Geneva to discuss the unique dynamics of the nicotine economy.
Paul thinks the tobacco industry should pay more taxes because they’re making a profit out of people’s addiction.
“If they cause death, they should be taxed to death. In the latest global adult tobacco survey, there was a reduction in tobacco use of about 20 percent, which essentially proves increasing taxes regenerates a lot of revenues but at the same time reduces consumption.”
Also on this episode of Counting the Cost:
Kaspersky Lab: If you’re a Russian cybersecurity firm these days, you’re not going to be very popular in some circles in the US. In fact, just this month, top US intelligence chiefs have publicly expressed doubts about the global cybersecurity firm Kaspersky Labs because of its roots in Russia. CEO Eugene Kaspersky discusses how cybercriminals are diversifying their business and learning from state-sponsored espionage.
Venezuela – an economy in ruins: Goldman Sachs is being accused of making a profit at the expense of the people of Venezuela. Demonstrators gathered outside the bank’s headquarters in New York this week. They’re angry about the bank’s purchase of almost $3bn worth of bonds in the country’s state-owned oil company. Venezuela is running out of food and medicine but the government continues to pay its creditors or bondholders to prevent a debt default. Those creditors, like Goldman’s asset management arm, are buying corporate and sovereign debt because of the potential to make big profits, betting the country will continue to pay the interest on that debt. Edward Glossop from Capital Economics in London explains why investors are piling into the world’s worst economy.
Amazon leapfrogs: In the first hour of trading Tuesday, Amazon crossed the $1,000 a share threshold before sliding back under. Still, it was the first time Amazon had reached the milestone, and was a long way from the company’s 52-week low of $682 a share.
Kenya rail: Kenya unveiled its first new railway in a century this week, with Chinese help. The first section of the multibillion-dollar project is now operational after 2.5 years of construction. The route will eventually link Kenya to several of its neighbours.