Big Tobacco: If You Got Em’, Smoke Em’

By Joshua Robbins

Is there such a thing as a stock that is taboo? In the capitalist since of the word, no! But many liberal media moguls attempt to pulverize various businesses because they supply a release that can be hazardous to others. Of course they fail to mention the SUV that they drive, due to the toxins release from the burning of fuel, can be just as harmful. So as the world unites against the tobacco industry with crazy laws, ticketing, and out right blacklisting, I say light up and burn as it is your choice.

One way of looking at the cigarette industry is that when people smoke, it becomes addictive. This addiction supplies a demand and many are willing to pay astronomical amounts to continue this addiction. In the narcissistic environment that we have created, I find it hard to believe that that the “earth worm” on the soap box is really concerned about the health of another individual; they are probably more concerned about staying on their “soap box” and will support any cause that draws personal attention. But the idea is that we live in what is “still” to be a free country, although we are looking more like the French everyday, proves that we can make our own decisions. I suppose it comes down to the poison you pick. But that poison could be very lucrative, meaning that it is a good chance you will be able to pay for chemotherapy if you buy stock in the cigarette brand you currently smoke. I mean, why not? Cigarettes are here to stay!

The history of tobacco is interwoven with that of our country. The early Native Americans prized and enjoyed the aromatic golden tobacco leaves that were indigenous to their land. When Columbus set foot in the new world, his crew members were the first Europeans to smoke tobacco, taking the custom back with them when they returned home. From the beginning as one of America's first exports, tobacco has been a source of revenue for more than 400 years!

The colonists discovered the value of tobacco after other pursuits such as mining precious metals, glass-making, and ship-building floundered. Led by James Rolfe, who married Native American princess Pocahontas, the colonists began exporting tobacco where pipe smoking was becoming popular. By 1703, the colonies had exported 23 million pounds of tobacco to Europe -- a remarkable achievement considering the cargo limitations in ships of that era.

The proceeds from tobacco laid the foundation for our infant nation's economic existence. The leaf was so valuable that it was accepted as legal tender, used for wages, and to pay debts and taxes. During the American Revolution, tobacco paid the interest on loans from France, sustained the Continental Congress and purchased war materials.

George Washington, as Commander of the Revolutionary Army, issued a public appeal to supply his troops. Said the future President: "If you can't send money, send tobacco." Washington was himself a tobacco farmer, as was his colleague Thomas Jefferson, the nation's third President.

Tobacco's contribution to our independence was recognized by including the 'golden leaf' as design elements in capital buildings in Washington, D.C., including the Corinthian columns in the old Senate chambers. Today, approximately 45 million Americans enjoy cigarette products, and thousands of jobs and billions of dollars are generated every year through the manufacturing, distribution and sale of tobacco products. A study conducted by the American Economic Group for the Tobacco Institute indicates the tobacco industry's impact on the U.S. economy in 1994 was $54.3 billion in wages and other compensation.

Tobacco was the seventh largest cash crop overall in the U.S. in 1994, representing just under 3% of the total value for all cash crops and farm commodities. However, at over $4,000 per acre, tobacco is clearly the most valuable crop -- exceeding the combined dollar value per acre for such leading cash crops as wheat, hay, soybeans, corn, cotton, peanuts, and tree-nuts.

The economic cycle of tobacco begins anew each year with the planting of seed beds. After the plants emerge, they are transplanted to fields to be cultivated for several months.

The tobacco is then harvested and placed in barns to cure. Finally, leaves are packed and delivered to auction warehouses for sale to manufacturers, both here in the U.S. and around the world.

There are six major forms of tobacco grown in the U.S., each having different characteristics: flue-cured, light air-cured (burley and 'Southern Maryland'), fire-cured and dark air-cured, cigar wrapper, cigar binder, and cigar filler tobacco. Together, North Carolina and Kentucky account for two-thirds of U.S. tobacco production. Flue-cured tobacco, grown mostly in the eastern coastal states of North Carolina and South Carolina, represent more than 50% of the crop. Burley, primarily grown in Kentucky and Tennessee, accounts for 40% of tobacco production.

The Tobacco Institute estimates that tobacco was grown on over 124,000 farms in 21 states and Puerto Rico in 1994, employing over 142,000 full-time equivalent employees. Since work on tobacco farms is often a part-time job, the total number of actual workers was estimated at over 361,000. Total wages and compensation were over $929 million.

After the tobacco is harvested, it is taken to auction warehouses in 136 designated markets -- sold in time-honored tradition to the sing-song chant of the auctioneer.

In 1994, a total of 673,000 acres of tobacco was harvested in the U.S., producing 1.5 billion pounds of tobacco leaf. The crop was sold at auction, fetching $2.8 billion -- $1.3 billion of which was for customers outside the U.S.

Tobacco manufacturers operating in 24 states buy the leaf for a variety of intermediate and final products. Some manufacturers are dedicated to 'stemming and redrying,' preparing tobacco for the manufacturing process. Others produce final tobacco products, including cigarettes, cigars, chewing tobacco, snuff, and smoking tobacco.

Total U.S. consumption of tobacco products in 1995, including overseas armed forces, was 485 billion cigarettes, 2.3 billion large cigars and cigarillos, 14.7 million pounds of pipe and smoking tobacco, 61.8 million pounds of chewing tobacco, and 62 million pounds of snuff.

Within the different segments, manufacturers provide a wide variety of brands and styles to meet consumer preferences.

In 1994, U.S. manufacturers produced almost $27 billion worth of tobacco products, including exports valued at $5.4 billion. They employed more than 42,000 people while providing wages and compensation of nearly $2.1 billion.

U.S. Department of Commerce data in 1992 indicated that wages for tobacco manufacturing employees were significantly higher than in many industries. Sporting goods manufacturers, for example, employed almost 20,000 more people than tobacco manufacturers, but total wages and compensation were about $300 million less.

Direct Jobs:

212,796 Suppliers

155,731 Retail Trade

142,059 Tobacco Growing

98,866 Whole Sale Trade

42,260 Manufacturing

10,510 Tobacco Auction Warehousing

Compensation:

$5,455,908,322 Suppliers

$3,793,194,719 Wholesale Trade

$2,748,577,218 Retail Trade

$2,071,862,721 Manufacturing

$929,775,133 Tobacco

$162,453,922 Tobacco Auction Warehousing

Wholesalers or distributors in each of the 50 states buy finished tobacco products and sell them to exporters and domestic retailers. Wholesalers employed almost 99,000 people as a result of tobacco sales and provided $3.8 billion in wages and compensation in 1994.

Retailers are the final link in the chain from tobacco growers to the ultimate consumers. Over 70% of tobacco products were sold through grocery and convenience food/gas outlets.

The National Association of Convenience Stores estimates that tobacco accounts for about 27% of the sales of the average store. Retailers employed almost 156,000 persons as a result of tobacco sales in 1994, providing wages and compensation in excess of $2.7 billion.

Other retail outlets include department stores, variety stores, discount clubs, delicatessens, meat and fish markets, restaurants, bars and taverns, drug stores, liquor stores, gift shops, novelty stores, souvenir shops, tobacco stores, newsstands, and vending machines.

Indirect Jobs:

383,688 Businesses and Personal Service

308,475 Whole Sale and Trade

185,430 Manufacturing

92,734 Finance

87,426 Transportation

33,138 Mining

32,138 Government

26,703 Agriculture

Indirect Income:

$12,019,893,709 Businesses and Personal Service

$8,132,437,486 Whole Sale and Trade

$7,923,538,444 Manufacturing

$4,250,225,335 Finance

$3,928,413,850 Transportation

$1,278,670,324 Mining

$1,155,329,061 Government

$463,964,327 Agriculture

The cultivation of tobacco, combined with the manufacture and distribution of products, results in ongoing purchases of goods and services from every leading industry. The tobacco industry purchases more than $13 billion in goods and services from 37 other industries in 1994. As a direct result, suppliers provided the equivalent of almost 213,000 jobs and $5.5 billion in wages and compensation.

The paper and allied products industry had sales exceeding $1.2 billion to the tobacco industry in 1994, providing paper for cigarettes, packs, cartons, and cases, as well as for wrapping materials and general business supplies.

The printing and publishing industry had almost $1.9 billion in sales, primarily related to advertising materials.

The transportation industry provided $535 million worth of services. Industries supplying information technology, fertilizer, rubber, leather, fabricated metal, electricity, water and gas also had significant sales to the tobacco industry.

Like the ripples from a stone thrown in a lake, the activities of the tobacco industry create waves of economic benefits that flow continuously into almost every segment of the American economy.

A multiplier effect occurs when dollars paid by tobacco growers, manufacturers, retailers, and distributors are, in turn, spent by suppliers to buy needed goods and services from yet other companies. Employees in all sectors must also buy necessities such as food, clothing, and shelter. They also buy furniture, household appliances, cars and many other items, and pay taxes. The sequence goes through many cycles.

About 31% of the retail price of all tobacco products sold in the U.S. goes to federal, state and local treasuries in the form of consumer excise and sales taxes. In 1994, tobacco generated almost $6 billion in federal excise taxes and more than $9 billion in state and local taxes. The amount paid in federal excise tax would foot the bill for all of NASA's space flights on an annual basis.

When you add in the personal income taxes, corporate taxes, and general sales and use taxes at all levels, the tobacco industry contributed more than $35 billion in government revenues. This is more than state and local governments typically spend for such services as fire protection, police services, housing and community development, or parks and recreation.

The industry has also made a significant contribution to reducing the government’s foreign trade deficit, with a trade surplus of nearly $6 billion.

But tobacco's contribution to our way of life doesn't end here. The industry is deeply involved in communities in many ways, supporting programs that provide basic services for the economically, socially, and educationally disadvantaged. Numerous community institutions, traditions and events benefit from the generosity of the companies and the involvement and leadership of their employees.

No matter where you are or where you live, everyone knows someone whose livelihood is directly or indirectly affected by the economic strength of tobacco. The benefits of tobacco are enjoyed by everyone, and its future is our future.

Total Economic Impact of Tobacco

Summary*

DIRECT JOBS                           DIRECT COMPENSATION

Tobacco Growing             142,059   Tobacco Growing          $929,775,133

Tobacco Auction                       Tobacco Auction

Warehousing/Dist.            10,510   Warehousing/Dist.        $162,453,922

Manufacturing                42,260   Manufacturing          $2,071,862,721

Wholesale Trade              98,866   Wholesale Trade        $3,793,194,719

Retail Trade                155,731   Retail Trade           $2,748,577,218

Suppliers                   212,976   Suppliers              $5,455,908,322

TOTAL                       662,402   TOTAL                 $15,161,772,035

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INDIRECT JOBS                      INDIRECT COMPENSATION

Agriculture                  26,703   Agriculture              $463,964,327

Mining/Construction          33,516   Mining/Construction    $1,278,670,324

Manufacturing               183,430   Manufacturing          $7,923,538,444

Wholesale/Retail Trade      308,475   Wholesale/Retail Trade $8,132,473,486

Transportation/Com-                   Transportation/Com-

munications/Utilities       87,426    munications/Utilities  $3,928,413,850

Finance/Insurance                     Finance/Insurance

& Real Estate               92,734    & Real Estate          $4,250,225,335

Business &                            Businees &

Personal Services          383,688    Personal Services     $12,019,803,709

Government                  32,138    Government             $1,155,329,061

TOTAL                    1,150,111    TOTAL                 $39,152,832,535

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Tobacco-Related Taxes

TYPE                            FEDERAL                   STATE & LOCAL

Tobacco Excise & Sales          $5,659,846,000            $9,237,562,870

Personal Income Taxes           $8,084,467,353            $1,940,546,067

Corporation Taxes               $2,713,348,202              $422,037,906

FICA                            $6,210,023,320                        NA

General Sales & Use Taxes                   NA            $1,445,192,162

TOTAL                         $22,667,684,874            $13,045,339,005

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Direct & Indirect Jobs                                         1,812,513

Direct & Indirect Compensation                           $54,314,154,570

Total Taxes Paid                                         $35,713,023,879

(In addition, the industry and its employees pay numerous
other taxes and fees, including property taxes.)
*Latest figures available from a study conducted by
the American Economics Group for the Tobacco Institute.

Tobacco, which is located with in the consumer/non-cyclical sector has been long over due to start producing some real results. Credit Suisse states that the tobacco market is what is called “market weight”, but I believe it to be slightly overweight. Granted, a lot is paid out in litigation costs but on the same token, the same number we know that there is at least 9 millions obese smokers in the United States. At a pack a day, that adds up to millions per month and probably closer to billions per year, five year, and decade. But the Blue Collar Trader is not concerned about marketing, nor are we concerned about fitting in; that ship sailed in high school. What we are concerned about it low P/E’s and sweet dividend yields, which Big Tobacco provides some of the highest this side of the Atlantic!

Bottom-line: Tobacco is what it is and will never change. As the population increases so will the number of tobacco users. Because of this, you cannot go wrong when investing in any type of Tobacco related investment. Tobacco’s time has come and I believe it is about to pay out big!

To get more information on what Tobacco Companies the Blue Collar Trader is purchasing, please go to www.bluecollarinvestment.com and register. Here you will see what we are buying and why!