Does anyone smoke anymore?
The ‘90s were a decade of tech booms and S&L busts. Of budget surpluses and Monica Lewinski. And tobacco litigation. 46 states sued the major tobacco companies, claiming that smoking raised Medicare costs. Rather than fight it out, the parties agreed to settle. The states dropped their lawsuit, and the tobacco companies agreed to pay over $200 billion to the states over the next 25 years—the largest civil settlement ever.
Many states didn’t just wait for the payments; instead, they securitized them, pledging the expected payment stream and borrowing against it. But increased state and federal cigarette taxes have pushed sales down, and most of these bonds are now junk-rated.
In essence, too many people are quitting. Only 19%of Americans smoke now, significantly lower than the 25% who smoked at the time of the settlement. That’s good for their health, but bad for the health of these bonds.
Recently cigarette bonds rallied, based on a new court ruling that frees up more cash for bond payments—but it’s only temporary. When a product kills off its customer-base, it’s usually a bad investment.
Douglas R. Tengdin, CFA
Chief Investment Officer
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