Image source: Altria Group.
Tobacco giant Altria Group (NYSE: MO) is familiar with being at the center of controversy. Consumer advocates have long fought against Altria, Reynolds American (NYSE: RAI) , and other tobacco companies, arguing that their products are addictive and unhealthy and that restricting their availability and use is the best way to promote public health. In particular, many have objected to the fact that young adults can buy tobacco at a younger age than they can buy alcohol, and advocates have fought for measures that would increase the minimum age for purchasing tobacco products. Earlier this month, those advocates won a hard-fought battle in California, where the state passed legislation to boost the minimum age for tobacco to 21. The question for investors is whether moves like these pose a major threat to Altria, Reynolds American, and their peers in the tobacco industry.
The latest from California
In early May, California Gov. Jerry Brown signed a number of bills that will have an impact on the tobacco industry in the state. Among the measures was a bill that increased the minimum smoking age to 21, which enjoyed the support of several medical advocacy groups, including the American Cancer Society and the American Lung Association. With the passage of the law, the increase in the smoking age took effect on June 9.
Advocates for the bill argue that by increasing the smoking age, fewer young people will suffer from the adverse health impacts of tobacco. Studies cited by proponents of the bill found that most people who currently smoke on a daily basis began smoking when they were 18 or younger. Researchers argue that teenagers are more vulnerable to addictive behavior, making it critical to take steps to delay availability of cigarettes. Estimates have suggested that boosting the minimum age to 21 would lead to a 15% reduction in the number of young adults beginning to smoke, and that in turn could reduce the number of early deaths from tobacco use for those who are 16 or younger now by about 200,000.
California is just the second state to pass a 21-year-old minimum smoking age, joining Hawaii, which passed a law that took effect at the beginning of 2016. However, advocates have done a better job of getting municipalities to pass rules restricting sales of tobacco products to those under 21. More than 100 cities, including New York City, San Francisco, and Boston, now restrict sales of cigarettes and other tobacco to those who are 21 or older.
Should Altria worry?
For its part, Altria hasn't seemed overly concerned with the trends toward a higher minimum age for tobacco purchases. At the company's annual shareholder meeting, Altria CEO Marty Barrington said, "We do not market our products to young people. We market them to adult tobacco consumers." When asked a direct question about raising the minimum age, Barrington said, "We are in favor of minimum age," but also noted that "I think there are arguments to be sorted out about where to draw the line."
In the past, Altria has also argued that trying to implement policies at the local level leads to inconsistent application. The tobacco company has expressed a preference for allowing federal agencies like the Food and Drug Administration to consider the impact of minimum tobacco age laws in a scientific and evidence-based manner, with the goal of producing a more uniform treatment of tobacco products nationwide.
Meanwhile, opponents to the measures argue that they will be ineffective. Many young people under 18 who want to smoke or use other forms of tobacco have found ways around the law as it existed previously. Getting older friends to buy cigarettes for younger smokers has been common and could become even more commonplace under laws requiring that buyers be 21 or older.
Altria has faced legal battles in the past, and it has consistently found ways to remain profitable and grow its bottom line regardless of threats to its sales volumes. Nevertheless, even if minimum smoking ages don't have an immediate huge impact on performance for Altria, Reynolds American, and other players in the industry, they represent just one more in a series of threats that could eventually add up to more difficulties for the tobacco sector broadly.
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