A Nonhazardous Trade on Lorillard

The best thing about cigarette company Lorillard, producer of Kent cigarettes is that it has a plump 6% dividend yield. The worst thing about the company is that the dividend depends on menthol-cigarette sales that the federal government is considering banning within eight weeks.

This situation presents Lorillard's investors with difficult choices, while creating a high-risk, potentially high-reward trade for speculators.

Investors can hold the stock in anticipation the federal government increases regulations on menthol cigarettes but does not ban them outright. Or, investors can sell the stock now in anticipation of the worst-case outcome – a total ban.

As the maker of Newport, America's leading menthol brand, Lorillard (ticker: LO) would be crushed if such a ban were instituted.

Either choice, however, does little to contain the risk that will emerge on March 23 when the Tobacco Products Scientific Advisory Committee, a federal government committee that advised the Food and Drug Administration on cigarettes, presents a nonbinding recommendation to the FDA.

Rather than hoping for the best, or waiting for the worst, a better approach is redistributing the risk posed by the committee's menthol recommendations. A simple options strategy lets Lorillard investors, and there are many, continue to own the stock while protecting their money from an adverse outcome.

The price of Lorillard's stock has barely budged over the past year, though it has dropped some 14% in the past three months, offering investors a taste of what could be in store. Speculators, however, can consider buying bullish calls in anticipation the menthol ban proves to be much ado about nothing.

Citigroup's derivative strategists led by Olivier Sarfati told clients to consider selling a June $80 call and buying a June $70 put, which cost $1.85 when the stock traded at $75.26.

"We recommend this strategy because it gives investors who are long the stock, fully hedged exposure beyond a 7% decline, in the event negative headline risk persists in eroding Lorillard's share price, with the potential to participate in 7% of the upside if the stock rallies to the $80 strike call," the strategists advised clients in a Monday trading advisory.

The recommended strategy is known as a "collar" because it protects investors from losing money if the stock declines below the strike price of the put. In this instance, the put's strike price is $70. Put options increase in value when the associated stock price declines.

The strategy's drawback is that it limits potential profits as it also entails selling a call option. If Lorillard's stock surges higher because no recommendation is forthcoming to ban menthol, anyone who sells a call limits their profits to the call's strike price, which is $80 in the Citigroup strategy.

These trade-offs are, however, more than reasonable as they balance the now heightened risk of owning Lorillard stock against outcomes that are difficult to anticipate.

Reynolds Sells Pipe Tobacco, Roll-Your-Own Biz

Reynolds American said it has agreed to sell its Lane Limited business to Scandinavian Tobacco Group for $205 million in cash.

Lane manufactures a variety of tobacco products, including Kite and Bugler roll-your-own tobacco, and Captain Black pipe tobacco, and contributes $0.04 per share to Reynolds Americans annual earnings, producer of Camel cigarettes.

Reynolds American ( RAI - news - people ) said the sale allows it devote energy and resources to primary growth categories within its businesses.

Reynolds American shares are trading up slightly Friday.

Rival Altria Group , producer of Marlboro cigarettes( MO - news - people ) is trading up almost .1% Friday, while Lorillard trades up nearly .1% as well.

Will cigarettes be obsolete by 2050?

"It is quite possible that there will be no smokers left in Britain or many other developed countries in about 30 to 50 years," Citigroup analysts predicted Friday, in a report that sent tobacco company stocks tumbling. Smoking sales peaked in Britain in 1974, and in 1981 in the U.S., and they "appear to be falling in a series of straight lines" since then, Citigroup says. About 20 percent of Americans and Britons still smoke. Could that figure really drop to zero within a few decades? (Watch a report about Citigroup's analysis)

The trends are pretty clear: More than half of Britain smoked in the 1960s, so today's 21 percent is a pretty sharp drop, says Rachel Cooper in The Daily Telegraph. The understanding that cigarettes are deadly started the decline, and a series of recent smoking bans and other regulations are speeding it up. When they consider their "long-term" prospects, cigarette makers have to be quaking.
"Smoking could 'disappear' by 2050, says Citigroup".
There are many well known tobacco companies like Philip Morris , the producer of Marlboro cigarettes.

Smoking is more entrenched than Citigroup thinks: "Zero puffers in 30 to 50 years' time?" asks Cynthia R. Fagen in the New York Post. "Don't hold your breath." Smoking rates have dropped impressively in the past 50 years, but "the decline among American smokers is at a standstill now," and the millions who still smoke do so in spite of the bans, higher taxes, and other obstacles.
"Smoking population dying out"

Smoking's future is hazy: "The spiraling cost of cigarettes" is the biggest turn-off for smokers, says The Times of India. And while health experts welcomed Citigroup's analysis, they "warned that a more gradual cut in smoking was likely." In the end, as the analysts note, nobody can see the future. And the long-term trends could change quickly if there's a sudden loosening of cigarette laws — or a total ban on smoking.
"Cigarettes will be stubbed out by 2050"

Serious tobacco plan should start with illegal cigarettes

It's fascinating to watch the political dance around tobacco.

Politicians tell us all about the evils of smoking tobacco and offer very public displays to curb people of the habit.

But at the same time, they sit back and rake in the taxes drawn from people buying the legal product.

In recent years, we have seen greater restrictions on where people can smoke and how vendors can display and sell tobacco products.The latest is the unveiling of new warning labels on cigarette packages that will take up 75% of the pack with more graphic pictures and updated information.There will warning on Marlboro cigarettes packages and on Richmond cigarettes packages.
Health Minister Leona Aglukkaq also reiterated the government's commitment to better use social media in its anti-tobacco crusade.

That's fine, as far as it goes.

We have a responsibility as a society to create healthy communities, and eradicating smoking is a big part of that.

It's a dangerous habit, not only for those indulging but also for those in close proximity to smokers. The dangers are well documented, from heart disease to cancer to emphysema to the esthetics of brown teeth and yellow fingers.

But none of this is news.

Government needs to do better than new cigarette labels and the odd message on Facebook.

Tobacco Display Legislation Introduced in Parliament

Associate Health Minister, Tariana Turia has said that there is a need to get more serious about the risks of smoking and the harms caused by smoking.

Therefore, legislation was today introduced in the parliament in an attempt to discourage smoking by removing displays of tobacco products in dairies and other retail outlets.

She asserted that the Government was quite serious about the reduction of the harms caused by smoking. She said, "It's harder to quit when you walk into a shop and are confronted with the instant temptation of tobacco on display".

She asserted that most of the smokers wish that there was some way which could help them quit smoking. There is a strong link between displays and young people taking up smoking.

Some evidences have shown that tobacco displays prompt impulse purchasing. A time would come when a person would be able to walk into the local corner shop `without being confronted with images of tobacco enticing customers to take up a habit which is unhealthy, addictive, and costly'.

The Health Select Committee will now be asked for a sanction following which the committee will call for public submissions.