Florida's tobacco ban goes up in smoke

Despite dishing out one of the biggest punitive damage settlements in history, the State of Florida is abandoning the moral high ground and embracing the cigarette-makers it once smashed.

For four years, the state's pension fund prohibited itself from investments in tobacco companies but has now decided "for reasons of fiscal good sense" to lift the ban. The $99bn (£69bn) fund, which is run by a state-controlled board of managers, plans to start buying back the tobacco shares it sold in 1997.

The decision has caused outrage among health organisations, including the American Lung Association and American Heart Association.

The ban on owning tobacco stocks was placed on the fund just as the US litigation climate was rising. Throughout the Clinton era, the number of individuals trying to sue the big tobacco companies soared. In 1998, Philip Morris and three other companies agreed to pay 46 states $206bn over 25 years to help pay for health costs.

But the biggest private threat to the tobacco industry was raised in Florida, where it faced the first ever class-action smoker's suit to go to trial. Realising the potential for accusations of conflicting interests, the state's pension fund decided to dump all its tobacco investments, which included a hefty stake in Philip Morris.

In the months leading up to the verdict, tobacco stocks, already down from 1997 levels, tumbled hard. When the eventual decision came in July 2000, it looked as though the bears had been right. The companies were hit with $145bn damages, a figure commentators said could bankrupt the entire industry. But, since then, the cigarette companies have had a good run of market success. The companies continue to operate on large margins, and they have raised prices in the US without adversely affecting sales.

But, more critically, it became increasingly clear that these landmark legal cases the market feared would open the floodgates on more ruinous settlements, might not be so big a threat. Boosted by the presence of a Republican Administration, tobacco lawyers are now confident that the $145bn award will not withstand the appeal that was launched in its immediate aftermath.

To add to the joy, last week a $3bn damages award to an individual Californian smoker was reduced to $100m. The net result of all this has been great for US tobacco companies, and good for British American Tobacco, the only UK stock with significant US exposure.

Philip Morris was last year's biggest riser in the Dow Jones Industrial Average; up 91 per cent over the 12 months.

By selling its stake in tobacco companies, the Florida state pension fund missed out on all of that, and its performance suffered as a result. A spokesman for the State of Florida said: "The decision to lift the ban came down to sheer financial prudence.

"The fund lost around $300m by not owning tobacco shares, and with the market still bad, you want to be able to own the stocks that keep your pensions safe."

Florida's decision has prompted various other states that banned tobacco ownership to review their strategy. "I am looking forward to a buying boom in tobacco now that these state authorities are back on side," said one Wall Street tobacco analyst.

Florida's decision has prompted an outcry by various groups. Rich Hamburg of the American Heart Association said: "The reversal is a bad example for other states, and a terrible example for the nation's youth.

"Florida has been running a scheme to try to keep kids off cigarettes and it had been working. I can't see that this move will help that particular drive one bit."