Altria and Reynolds American; Report 2014

Altria and Reynolds American, the maker of Winston cigarettes http://cigarette-deals.com/winston-cheap-cigarettes regularly raise their prices to offset declining cigarette shipment volumes. Bearish arguments against both companies usually declare that rising prices, exacerbated by higher excise taxes, will hit a ceiling and cause revenues to decline.

That argument initially makes sense when we compare the price of cigarettes in the U.S. to other nations. Forty percent of adults smoke in Russia, where a pack of cigarettes costs $1.74 with taxes included. By comparison, 18% of adults smoke in the U.S., where an average pack of cigarettes (averaged across all states) costs $6.36.

But when we calculate the price of cigarettes as a percentage of average monthly income (based on UNECE and ILO statistics), the average Russian spends 0.17% on one pack of cigarettes, compared with 0.14% for the average American.

Meanwhile, smokers in the U.K. spend $10.99 (0.32% of their monthly income) on a pack of cigarettes, yet the country has a higher smoking rate of 19%. In Australia, where a pack of cigarettes costs $12.14 (0.47% of monthly income), 17.5% of adults still smoke. These comparisons suggest that Altria and Reynolds American can probably afford to nearly double their U.S. prices over the next decade without any noticeable impact on smoking rates.

However, increased health awareness and public bans against smoking could reduce the nationwide smoking rate. Higher federal and state excise taxes, which rose over 120 times between 2000 and 2013, could also throttle tobacco companies' ability to raise their own wholesale prices.