What Do Nicotine Laws Mean for Tobacco Stocks?

Tobacco stocks are the bedrock of many income investors' portfolios. So what does the U.S. Food and Drug Administration's announcement mean for shareholders?

Philip Gorham 31 July, 2017 | 11:33AM
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The U.S. Food and Drug Administration's announcement that it intends to lower levels of nicotine in cigarettes will not impact the outlook for tobacco companies, according to Morningstar equity analysts. We are fairly sanguine about the impact on tobacco manufacturers' long-term cash flows from and we maintain our wide moat ratings and fair value estimates.

The share price correction brings it more in line with our fair value estimate

Such measures are likely to accelerate the migration of smokers to substitute products, and we expect the large tobacco companies to continue dominating the industry. Although we do not believe the valuation of British American Tobacco (BATS) has been impaired by the high-single-digit amount implied by the market's reaction, we have considered the company as being substantially overvalued for some time, and the correction brings the market price more into line with our fair value estimate.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
British American Tobacco PLC2,734.00 GBX-1.32Rating
Imperial Brands PLC1,543.00 GBX-0.61Rating
Philip Morris International Inc98.94 USD-0.90Rating

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Philip Gorham  

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