Tobacco stocks will be hit with a new tax to fund the NHS if Labour wins the next election. The leader of the opposition Ed Milliband yesterday announced new plans to fund expansion to the National Health Service, starting with a £150 million tax on tobacco companies.
Imperial Tobacco (IMT) is the UK’s largest tobacco company and is expected to bear the brunt of the tax. Imperials director of corporate affairs Axel Gietz this morning called the tax unjust.
“Targeting one individual industry that happens to be unpopular with an additional tax is totally unwarranted and unjust and just a bad idea,” he said.
"If you look at the taxation level of tobacco products in this country we are at 86% of the price of a pack of cigarettes in this country.”
Gietz warned that if tobacco companies were forced to raise the price of cigarettes this could force consumers to buy dangerous illicit goods.
Despite the outrage, analysts are highlighting that £150 million is not a significant levy when compared to the revenues of these megacaps. Broker forecasts put pre-tax profits for Imperial for 2014 at £1.46 billion.
Will it Affect the Dividend?
Several of the largest and most successful UK equity income funds own tobacco stocks, including Neil Woodford in his Woodford Equity Income fund. British American Tobacco (BAT) is the third largest holding at 5.74% and Imperial makes up 5.72% of the fund.
This is because tobacco companies are among the highest yielding in the FTSE, with Imperial paying more than 4%.
Imperial also makes up 5% of Threadneedle UK Equity Alpha, 4.83% of Invesco Perpetual High Income and 4% of Fidelity Moneybuilder Dividend.
Woodford Funds has pressed to investors that tobacco companies remain an important part of their strategy and this potential measure does not affect their conviction in the sector.
Analyst’s View: Imperial’s Fair Value Would be Downgraded
Two new regulations proposed in the U.K. and France pose a threat to Big Tobacco profitability. Both are far from being implemented, however, and we are retaining our wide economic moat ratings and fair value estimates for the tobacco firms under our coverage until we see evidence of the probability of implementation growing, says Morningstar equity analyst Philip Gorham.
Imperial Tobacco would be the hardest hit by such a tax, and would contribute £60 million to £65 million per year, followed by Japan Tobacco with £57 million. We estimate that this would negatively impact our fair value estimate for Imperial by £7 per share, or 8%. The fair value estimate is currently £26.50, and the stock is trading at £26.90.
