Wednesday, February 17, 2021


Here is a table that I found showing nicotine category sales (cig/smokeless/vapor/cigars) and units as of February 6, 2021. You can see that e-cigs and vapor products are way up year-over-year. Cigarettes, which are the most important category, had a 2.5% volume decline but a 6.8% price increase, which nets out to a 4% increase in revenue. 

That is consistent with what we have seen from the Marlboro brothers (MO and PM), and with what we saw in BTI's earnings report today:

On a reported basis, revenue was marginally lower than the prior year (down 0.4%), with good growth in New Categories up 14.9%, supported by strong combustibles price/mix of 7.3% offset by a translational foreign exchange headwind of 3.5%, and a 4.6% decline in total cigarette volume.

It is funny that people think that the tobacco business is dying when its revenues are growing. We have shorted plenty of dying businesses and industries at CBS, and one thing they have in common is falling revenue. 

Take Frontier Communications (FTR) which we wrote about in December 2019. Their revenues were falling at a mid single digit annualized rate consistently for two years before they filed for bankruptcy. And they were in a very high fixed cost business, unlike the tobacco companies.

I'll be worried about tobacco investments if cigarette revenues and profits fall, and if nicotine alternatives are not profitable enough for the big tobacco companies to compensate for the decline.

But I am bullish on nicotine alternatives, based on a theory I am developing that society is under-nicotined. A friend has a concept of "Conservation of Intoxication," whereby individuals need to manage their brain chemistry with a melange of chemicals in order to feel good. The list, much of which goes back thousands of years and is very Lindy, includes ethanol, caffeine, and nicotine. It also includes refined carbohydrates. 

You will notice that a lot of these substances tinker with dopamine. The Conservation of Intoxication theory says that if people kick some of these substances you would expect remaining ones to go up. The classic example is the Mormon who binges on sugar because he can't have any of the other substances. And Utah and Idaho are the only places I have been where you can go to a drive-through to buy a sugar cookie and a Mountain Dew soda with cheesecake flavored syrup added.

Look at a graph of nicotine consumption and obesity rates from the 20th century; they are mirror images. The lines cross in 1990. Did quitting smoking cause people to kill themselves with food? Nicotine helps people moderate their appetites.

Society is craving nicotine after a few decades without it. If they can get it from reduced harm nicotine products, people might eat less and be thinner and healthier. Maybe more sociable too. And if big tobacco squeezes out smaller vaping competitors, they will print money selling the new delivery vehicle.


CP said...

BTI earned $6.4 billion pounds last year, up from $5.7 billion the prior year. That is $8.9 billion in USD.

Current market cap is $85 billion.

Dividend yield is 7%.

Stagflationary Mark said...

A friend has a concept of "Conservation of Intoxication," whereby individuals need to manage their brain chemistry with a melange of chemicals in order to feel good.

Credit card bingeing (in order to feel good) has certainly been a very poor substitute. Horrible hangover. Very difficult to sustain long-term.

Psychology Today: Shopping, Dopamine, and Anticipation

Many people think that dopamine is released when the brain receives a reward, but dopamine is actually released in anticipation of a reward. It’s the dopamine that keeps the monkey pressing the bar until the treat arrives.

I am certainly not immune to this effect over the past year. When I bought the “Pandemic: Hot Zone - North America” board game during an actual North American pandemic, I felt the anticipation and dopamine, much like a monkey.

It didn’t stop there. Due to the pandemic, I’ve rediscovered a love of board gaming that I had back in college. I definitely have/had a lot of hidden pent-up demand for that dopamine source apparently.

CP said...

How's it going with your utilities? Any interest in pipelines?

Stagflationary Mark said...


This is your quote that most resonated with me. I really like that value mindset.

Like tobacco, there is the mistaken perception that the oil business is dying.

I think the same may apply to utilities (to a lesser extent). In 2016, there were a lot of articles about the death of utilities due to all the usual suspects (like solar panels on homes leading to a death spiral). 5 years later, utilities continue to increase dividends though.

It’s been almost 2 months since I invested in VPU. Since then, long-term rates have risen substantially (which hurt TLT substantially and hurts interest rate sensitive sectors like utilities). Texas is experiencing a utilities crisis. And yet, as of right now, I’m up 2.2% (temporarily exceeding my low expectations). Go figure.

I can’t say what the future will bring, but I’m still sleeping well holding utilities. So, here I sit. 2 months down. 198+ months to go. I only wish that those who are in power in Texas had not taken the reliability of utilities for granted, because those not in power are needlessly suffering.

Hard to sleep when you’ve got no power. Literally.

I love that Elon Musk has embraced bitcoin. He’s got it all. Environmentally friendly electric cars AND extremely energy intensive and wasteful bitcoin mining? What a dopamine guy. He’s going to singlehandedly both save and destroy the planet simultaneously. In any event, might someday need more utilities infrastructure just to fuel his electricity addiction.

One can hope (if one is investing in utilities infrastructure improvements).

Allan Folz said...

Just happened to notice the zero coupon long bond ETF, ZROZ, has a distribution yield of 1.77%.

Ok, ok, I'm sure there's a rational (not gonna call it good) explanation of rolling constant maturity yada, yada, yada in the prospectus, but...

SPY has a yield of 1.54%.

I know the answer, but still, is there anything Wall St can't **** up?

AV said...

I've also always wondered about the cigarette/obesity relationship. Would be interesting to see in other countries. Asia would be the most interesting example since pretty much only men smoke there. Did women's obesity rates increase more than men's in China over the past 30 years? Japan didn't hit peak smoking until the 80s, so that would be an interesting study too. Another interesting study of alternative nicotine consumption might be Sweden, where oral tobacco use is/was very common, but smoking relatively rare compared to Denmark and Norway. I believe Sweden is (was) the only country where there are more oral tobacco users than smokers.

The other bullish thing about big tobacco is that we are probably pretty close to federal de-scheduling of cannabis. When that happens, big tobacco is going to try to force all kinds of federal regulations onto cannabis to crush the little guys, just like what is being done with vape juice. Let's also not forget that in Europe, cannabis is most commonly consumed mixed with tobacco either as a spliff or as hash + tobacco. If the EU decides to legalize cannabis, I would wager that cannabis laced tobacco will be a big seller.

CP said...

The idea of treating tobacco dependence and obesity together is a provocative one. The first drug to offer such treatment was rimonabant, a cannabinoid receptor antagonist. The cannabinoid receptor appears to be involved in reward pathways for both nicotine and food. In clinical trials, rimonabant was shown to be effective both for smoking cessation and for weight loss and control of metabolic syndrome. Unfortunately, because of its adverse psychiatric side effects, the drug was not approved for use in the United States. Bupropion, as mentioned above, is effective for smoking cessation and has also been used for weight loss. Bupropion increases levels of dopamine and norepinephrine in the brain, similar to the effects of nicotine. Indeed, nicotine itself might be considered a potential long-term approach to weight control. The major concern with using nicotine (and other sympathomimetic drugs) as medication is its association with cardiovascular toxicity. Nicotine increases heart rate and cardiac work, potentially contributing to endothelial dysfunction and insulin resistance. However, most of the cardiovascular risk from smoking comes from oxidants and particulates rather than from nicotine. An informative test of the long-term safety of nicotine per se is the use of snus, a form of smokeless tobacco, by men in Sweden. A large percentage of men in Sweden use snus and do not smoke. Nicotine exposure from snus is similar to that from cigarettes, but most of the epidemiological studies in Sweden have found little or no increased risk of cardiovascular events in snus users.

Smoking causes lower body mass index (BMI) (Winsløw, Rode, & Nordestgaard, 2015) probably because of the anorexic effect of nicotine. The behavioural aspects to smoking (hand to mouth action, opening cigarettes, putting cigarettes in the mouth and time taken by smoking) fill time and provide distraction that may influence food consumption (Glover, Breier, & Bauld, 2017) although evidence from low nicotine cigarettes and comparisons between inhalator and patch tend to go against this assumption (West et al., 2001; West, Russell, Jarvis, & Feyerabend, 1984). Smokers are therefore, in general, lighter than non-smokers. As smoking rates have declined in many countries in recent years, obesity rates have risen. One analysis has suggested that up to 14% of the rise in obesity rates in the USA, for instance, could be attributable to the drop in smoking over the same period (Courtemanche, Pinkston, Ruhm, & Wehby, 2016). There is strong evidence that many people who successfully stop smoking gain weight. A meta-analysis found mean weight gain was 4.8 kg at one year, although there was a lot of variation between individuals, with 13% of quitters gaining >10 kg (Aubin, Farley, Lycett, Lahmek, & Aveyard, 2012).

CP said...

BAT shares are trading at a 7.8x P/E and a 12.3% Free Cash Flow ("FCF") Yield; the Dividend Yield is 8.3% (215.6p), with the dividend having been raised 2.5% in 2020, in line with the 65% target payout ratio.

CP said...

“Intoxicants,” Siegel wrote, “have been a natural part of the diet of life ever since it began on this planet.” The desire to become “intoxicated”—what Siegel calls “the fourth drive”—he says, “is natural, yes, even healthy.” That’s why we need to try and formulate “safe drugs.” He rejects what he calls the “Calvinist psychopharmacology” of the drug war and he urges us to make safe, delightfully intoxicating drugs as a positive human project.

CP said...

Just an update note that Lyall Taylor is a chain smoker:

Chris DeMuth Jr said...

Snus save lives.

Smokeless nicotine innovation is the greatest medical advancement since penicillin.