Tobacco Companies Get Rich Marketing to Kids

For four decades, the U.S. benefited from a sharp and fast decline in smoking rates. That period has come to an end, and the smoking rate has stabilized at about one fifth of U.S. adults, the Centers for Disease Control and Prevention says.

About 446,000 people in the U.S. continue to die each year because of smoking-related illnesses, according to the CDC. More than half of all kids in the U.S. are exposed to secondhand smoke and 98 percent of children who live with a smoker have toxic chemicals in their blood, the CDC report says.

Smoking rates vary widely across the U.S. Utah has the lowest rate 10 percent, probably due to its large population of Mormons, who are instrucuted to avoid the practice. California has the second lowest rate, thanks to an aggressive anti-cancer campaign that could prevent 5 million people from smoking if adopted nationwide, the CDC says. Smoking rates are highest at 36 percent in Kentucky and West Virginia.

Meanwhile, the tobacco industry is growing and profiting despite anti-smoking campaigns funded in part by cigarette taxes. While the smoking rate is down from its peak during the mid-1960s, when 50 percent of men and 33 percent of women light up, there is still lots of cash in the business.

During a time of economic weakness and slack equity markets, tobacco companies are favorite dividend-generating stocks for income investors. They are considered consumer staples, falling into the same class of necessities are food and toilet paper.

To understand just how powerful the industry remains, consider the recent success of Altria and Philip Morris International, companies that emerged from the state-led tobacco wars of recent years.

Altria is the the U.S. business, and includes brands such as Marlboro. It owns 100 percent of the Philip Morris U.S. business. Philip Morris International was spun off from Altria and markets to the rest of the world, featuring brands such as Bond Street. It's based in Lausanne, Switzerland.

Altria, with a market cap of $48.71 billion, is trading today at $23.88, a 52-week high. Its bottom for the year is $17.28. The shares are up 25 percent over the last 52 weeks, compared with 7 percent for the S&P 500. The company has earnings growth of 3.2 percent, but it's the 5.1 percent dividend yield that is compelling to investors. The forward-looking yield is expected to rise to more than 6 percent.

The outlook abroad is even better. Philip Morris International has a market cap of $98 billion. The company's earnings growth is 28 percent on a year-over-year basis.

How is that possible, given the anti-smoking climate of recent years?

CDC director Thomas Frieden says the tobacco industry is better at "sidestepping government efforts to minimize smoking," according to the Los Angeles Times. "Among their activities, he said, are targeting price discounts at children to get them to start smoking and finding new ways to promote products, such as introducing flavored lozenges to get around the ban on flavored cigarettes," the newspaper said.

And in many other parts of the world, anti-smoking efforts are lax at best. Philip Morris International's homepage even boasts a link to the Barclays "back to school" investor conference.

People throughout the world continue to smoke, and pay the price with their lives. Meanwhile, the tobacco companies are getting richer by the day, mastering the art of marketing their highly engineered cigarettes that optimize the delivery of addictive nicotine.