Cigarette Shipments Fell 3.9% in 2nd-Quarter, Reynolds Says

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  • Tobacco bonds among best performing municipal debt this year
  • Industry shipments had increased in 2015 as gas prices fell

Reynolds American Inc. , the No. 2 seller of tobacco in the U.S., said the industry’s domestic cigarette shipments declined almost 4 percent percent in the second quarter from the year-ago period.

The shipments, which determine the payouts that states used to repay about $33 billion of tobacco bonds, were knocked by changes to wholesale inventory levels, the Winston-Salem, North Carolina-based company said in its quarterly report. Shipments are down about 2 percent for first half of 2016, compared with 2015.

Speculative-grade tobacco bonds have gained 14.3 percent in 2016, second-most among all segments of the $3.7 trillion municipal market, as investors scramble for higher-yielding bonds, Barclays Plc data show. That follows gains of 15.8 percent and 19.2 percent in the past two years.

“It’s been a great run,” said Bill Black, who oversees the $960 million City National Rochdale Municipal High Income Fund.

That run won’t continue because cigarettes are an easy target for cash-strapped governments that can accomplish the twin goals of raising revenue and cutting smoking by increasing taxes, he said. Cigarette sales fell 9.2 percent in 2009, spurred by a 62-cents-a-pack federal tax increase that year and declined another 6.4 percent in 2010.

Tobacco Bonds

“That is what is going to change it, get it back to the regular norm of, call it, a 3 percent decline rate,” Black said. Tobacco bonds made up about 9 percent of City National’s high income muni fund.

Shipments increased 1.9 percent in 2015, as smokers plowed savings from lower gasoline prices into cigarettes, according to the National Association of Attorneys General.

Since 1999, 19 states and territories and a handful of counties in New York and California have issued municipal bonds backed by the payments due under a 1998 settlement with 46 states, according to Nuveen Asset Management.

Moody’s Investors Service projects 80 percent of the securities may default, based on historical declines of 3 percent to 4 percent in U.S. smoking.