Investors in Altria Group (NYSE: MO), Reynolds American (NYSE: RAI), and other tobacco companies around the world understand the risks inherent in investing in the industry. Cigarettes have been demonstrated to have negative health impacts, and even big tobacco companies like Philip Morris International (NYSE: PM) have started to respond to these potential harms by looking at alternatives to traditional cigarettes that carry reduced risks for consumers.
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When you look at the numbers that government agencies, consumer advocates, and other anti-smoking groups provide, it's easier to understand some of the challenges that cigarette makers face in sustaining their businesses. Let's look at four particularly noteworthy statistics.
Image source: Altria Group.
1. Potential international growth of 45% in two decades
Even advocates who are trying to stamp out smoking admit that they're losing ground on a global scale. There are about 1.1 billion smokers in the world currently, according to the nonprofit group Action on Smoking & Health, and that number is expected to grow to 1.6 billion over the next 20 years.
In part, those numbers reflect the sluggish pace of regulation in areas where smoking is most likely to rise. Only a small fraction of countries have provisions like smoke-free laws, government services to support those seeking to quit smoking, and bans on advertising on tobacco products that are most likely to keep smoking rates down. As a result, those tobacco companies focusing on the international market have plenty of potential for growth.
2. Cigarette smoking kills 480,000 Americans annually
Tobacco use has long been the single largest preventable cause of death in the U.S., according to figures from the Centers for Disease Control and Prevention. The CDC estimates that more than 480,000 Americans die each year from smoking, with 41,000 of those deaths coming from the effects of secondhand smoke.
Most people think of lung cancer as the key cause of death related to smoking, but the practice has been linked to a host of other diseases -- including respiratory diseases, cardiovascular diseases, and diabetes -- and other adverse health effects. Government health advocates are convinced that the costs of encouraging smoking cessation are worth the savings those efforts produce.
3. The staggering economic costs of smoking
In addition to the number of deaths, the amount of money and resources that goes toward caring for those with smoking-related illnesses is surprisingly high. The CDC estimates that the direct costs of medical care in the U.S. for adults who need it because of tobacco products add up to almost $170 billion annually. In addition, lost productivity from workers who take time off due to smoking-related ailments brings the total cost above the $300 billion mark.
Smoking is a big enough cause of economic damage that the insurance industry makes smoking one of the key factors in determining premiums for life insurance. Moreover, the difficulty of quitting smoking makes cessation products an extremely lucrative market, adding to potential revenue for businesses related to the practice.
4. Tobacco is still big business, despite downward pressures
Even with falling smoking volume in the U.S., the sheer amount of tobacco in the market is impressive. More than 24 billion cigarettes were produced in the U.S. market in October, the most recent month for which data from the Treasury's Alcohol and Tobacco Tax and Trade Bureau were available. So far in 2016, 233 billion cigarettes have been produced, along with almost 5.4 billion cigars, 100 million pounds of snuff, and roughly 50 million pounds of tobacco for chewing, pipe, or roll-your-own use.
Believe it or not, those figures are actually down considerably from year-ago figures. Cigarette use has dropped by about 10 billion units this year compared to this time last year; although smaller cigars have seen volumes rise, the bigger large-cigar market has seen drops of nearly 10%. That has resulted in sales-volume declines among large producers, but their ability to succeed speaks to the experience they have fighting such trends.
Tobacco companies have managed to overcome statistics like these and still produce growing profits over time. However, given the severity of some of these numbers, it's understandable why even industry stalwarts are looking closely at reduced-risk alternatives in an effort to try to put some of these statistics behind them once and for all.
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