Tobacco Dollars

Make no mistake about it: tobacco is a booming business.

And it’s creating monstrous profits for big tobacco businesses. Philip Morris International (PMI) has posted gains every year for the past half decade. As a matter of fact, revenues for 2011 totalled over $12 billion, approximately $2.2 billion more than 2010. Business is a boomin’.

Even amidst the stringent American regulations regarding the sale and use of tabacco, PMI is able to branch out and exploit the ignorance of less developed countries, most notably the BRIC states. These are the fundamental drivers behind revenue. The breakdown of revenues by geography, located below, shows that Asia is the fastest growing segment, and not without good reason. Percentage of cigarette companies’ foreign revenue:

As mentioned in our class study, China has more smokers than the United States has inhabitants. The market is astronomical. This is due in part to the ignorance of the dangers of smoking. As long as companies continue to exploit this, profits will be there to make and dividends will be hefty. PMI’s earnings per share this year were 4.85, up from 3.92 in 2010. Dividends paid equalled $2.44 per share, This is a significant increase, and it rests on the company’s ability to leverage its market share in the European Union and China as demonstrated below. Dollar-value of cigarette companies’ foreign revenue: (in thousands)

The main drivers of this industry are the cultural implications of smoking. Nobody enjoys the act of smoking a cigarette for the first time, but it represents a social practice that different cultures associate with a multitude of things that cause people to light up everyday. Obviously, it is an addictive habit, which does all the work of PMI’s profits, but as long as companies such as PMI have marketing budgets to advertise to developing nations, people will smoke and continue to do so. Not only will they continue to smoke, but they will drive the profits through the roof as has been evidenced by the steady increase of PMI’s net income. Knowledge is key as the rates of smokers in America is at record lows and the EU has shown a pronounced decline. Now consumers have a choice to make to stop and help kids like the one below.