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Sector Snap: Tobacco companies

NEW YORK (AP) -- A Citi Investment Research analyst said Friday that a new federal excise tax on cigarettes could actually lead to improved profit growth for tobacco companies.

Analyst Vivien Azer said tobacco companies have reported weak profit growth because they have made only small increases to their prices. However if the government creates a new tax on cigarettes, the companies would raise their prices to cover that increase and then some. Azer added that some states would probably add their own new excises on top of the federal increase.

The New York Times reported Friday that President Barack Obama will send Congress a formal budget proposal next week. The proposal would include a new tax on cigarettes and other tobacco products. That tax would be used to pay for aid that would allow states to offer free prekindergarten programs nationwide.

Azer said she believes tax would have to be between 75 cents and $1 per pack to fund the program. She added that 15 states are considering increasing their own tobacco excise taxes.

"While Republicans hold more power in Congress today than they did in 2009 (which may create a hurdle in terms of this legislation passing), we think that using another children's initiative to justify the tax increase greatly increases the chances of the proposal receiving bi-partisan support," Azer wrote.

The last federal tax increase on tobacco products went into effect in April 2009, and it raised the tax to $1 a pack.

Reynolds American Inc. shares declined 56 cents to $44.20. Lorillard Inc. shares fell 51 cents to $40.57 and Altria Group Inc. stock fell 32 cents to $34.84.