Tobacco Companies Hit a Supreme Court Hurdle

As sales of flavored tobacco products surged in 2019 and 2020, certain states started to take major measures to curb their image as a “less gross cigarette” and appeal to young adults. California Gov. Gavin Newsom signed a bill banning almost all flavored tobacco products in 2020 and, last November, voters upheld it by ballot vote.

While plans to institute it have stalled, the U.S. Food and Drug Administration has also put out a proposal that would prohibit menthol-flavored cigarettes (other flavored cigarettes are already banned since 2009) and flavors other than tobacco for cigars.

Massachusetts had already instituted a similar ban in 2019. California had become the second state in the country to do so.

While the bans are largely aimed at reducing cigarettes’ appeal to minors and young adults, the recent crackdowns have set off a major battle against lawmakers and tobacco companies.

Supreme Court Says No to Tobacco Companies

The California law makes exception for certain hookah, premium cigars and loose-leaf tobacco products but still set off a major outcry from the tobacco industry due to the “substantial financial losses” they say they’ll incur.

After California upheld the law, tobacco company R.J. Reynolds of British American Tobacco (BTI) – Get Free Report, along with several others, immediately called on the Supreme Court to stall or block the measure known as Proposition 31.

“They can raise the minimum purchase age, restrict sales to particular times and locations, and enforce licensing regimes,” the plaintiffs’ lawyers wrote in their application for an injunction. “But one thing they cannot do is completely prohibit the sale of those products for failing to meet the state’s or locality’s preferred tobacco product standards.”

When the FDA first announced its plans to ban menthol cigarettes in April, shares of BTI and Altria (MO) – Get Free Report dropped by a respective 1.9% and 1.2%.

The justices on Dec. 12 rejected the request and paved the way for the ban to proceed as voted on by Californians. The brief is very short and merely states that “the injunction pending appeal presented to Justice Kagan and by her referred to the Court is denied.”

Tobacco Companies Still Doing Well

“Flavored tobacco products have hooked a new generation of young smokers at a time when tobacco is already the No. 1 preventable killer in the United States,” California Attorney General Rob Bonta told local news outlets in a statement. “I applaud the Supreme Court for denying big tobacco’s latest attempt to block California’s commonsense ban on flavored tobacco products.”

But even with the ongoing battle for health and against tobacco use, British American Tobacco is doing relatively well. Morningstar recently named it as a Top 10 undervalued stock that is slated to do well despite the recession (at least in part because many of the people who smoke will not give up tobacco no matter which way the economy turns.)

“British American Tobacco stock is cheap, trading 26% below our fair value estimate,” Morningstar’s Susan Dziubinski wrote in a recent report. “One of the two largest listed global tobacco companies, British American Tobacco possesses a strong franchise and cost advantages, which have led to a wide economic moat rating.”

While British American Tobacco stock is up more than 18% since the start of the year, it is down 0.53% to 3290.03 Pound sterling (roughly $4070 USD) today at last check.

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