Fitch: SCHIP legislation to pressure U.S. tobacco

Fitch Ratings said the Senate-approved expansion of the State Children's Health Insurance Program will lead to excise tax increases that will negatively impact cigarette volumes, affecting Altria Group, Inc. (BBB+/stable) and its subsidiaries as well as Reynolds American Inc. (BBB-/stable) and its subsidiaries.

The expansion, once signed into law by President Obama, would be funded by a $0.61-per-pack, or 56%, increase in the federal cigarette excise tax. Fitch estimates that, based an average retail price of $4.45 per pack of cigarettes and all other factors being equal, a $0.61 increase would produce a volume decline of 3.5% to 7%.

The agency said that although large volume declines have the ability to disrupt tobacco companies' operating results in the near term and excise tax increases limit companies' pricing flexibility, tobacco industry participants have overcome large retail price increases in the past. And though Reynolds and Altria still rely primarily on cigarette sales, Fitch said the growth in the companies' other tobacco segments partially offset volume declines in their cigarette sales.

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