Should You Give Up Tobacco Stocks?

THE WEEK: Morningstar columnist Rodney Hobson considers sin stocks - companies that divide opinion but still deliver good returns to shareholders

Rodney Hobson 9 November, 2018 | 7:02AM
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Just up the A2 from where I live is a football team infamous for its supporters’ chant: Nobody likes us, we don’t care. Despite their divisive reputation, Millwall occupy a solid slot in England’s second division and seem to thrive.

One could draw comparisons with tobacco stocks, or increasingly, plastics companies. Several listed companies that make packaging and cigarettes arouse considerable antipathy, and yet they continue to flourish.

Take cardboard maker DW Smith (SMDS), which a year ago was struggling with rising costs or raw materials and energy but is now on a roll as it has succeeded in passing on those costs.

A trading update alerted the market that first half operating profits were materially ahead of last year’s strong performance. The interim dividend will probably show a double-digit rise, as will profits.

The shares rose on the update but they are still way below the summer peak of 579p. It may be some time before they reach those heights again, but they should rise further even if the best buying opportunity has gone.

Imperial Brands (IMB) is the only sinful investment in my portfolio and I keep thinking I should sell, not least because I have never smoked and feel guilty about making money from the unfortunate addicts who do. Hypocrisy can be a good bedfellow for an investor.

Imperial is selling less tobacco but is making up some of the deficit by selling at higher prices and it is reinventing itself as a manufacturer of vaping products, so revenue was actually a fraction higher in the year to the end of September. Profits are also holding up well.

I seriously doubt if vaping is any less unhealthy than ciggies but the tobacco companies, who are as hypocritical as I am, have managed to convince governments that it is so they will continue to survive for now. I do, though, have doubts as to whether Imps can keep raising the dividend – the latest pay-out is up 10%.

The shares reacted well but they are still down from £31.20 a year ago to below £27 now. They are more likely to rise than fall in the next few months. Someday I must give them up. Not just yet though.

Alcohol Stocks a More Acceptable Sin

I have no intention of giving up a moderate intake of booze, though I’m not a customer of JD Wetherspoon (JDW). Chief executive Tim Martin didn’t let a burst appendix stop him from making his customary anti-European Union rant in his trading update but put aside your Brexit views and look at the figures, which admittedly occupy a tiny part of the statement.

For the 13 weeks to 28 October 2018, Wetherspoon’s first quarter like-for-like sales increased by 5.5% and total sales by 6.2%. Two pubs opened and three were closed or sold but the franchise should grow with up to 10 new outlets added in the current financial year.

The shares have a tendency to move quite sharply so perhaps one should not be surprised at the 10% drop on the update. However, a glance at the share price chart suggests that such a fall presents a buying opportunity.

Sugar Tax Hits Confectionary Companies

I gave up sugar in my tea and coffee years ago. Tate & Lyle (TATE) cut down on the stuff more recently but Associated British Foods (ABF) is still stirring too much into the mix.

Changes in the EU sugar regime have brought a fall in prices that hurt what would otherwise have been decent annual results, with underlying profits up 3%. With the EU sugar market now fully deregulated, the impact will be worse in the current financial year as oversupply pushes down prices further.

ABF shares are recovering after falling heavily between last November and September. Until the outlook for sugar improves, investors should remain cautious.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Associated British Foods PLC2,442.00 GBX0.00Rating
Imperial Brands PLC1,773.50 GBX1.43Rating
Smith (DS) PLC360.20 GBX-9.86
Tate & Lyle PLC636.50 GBX0.00Rating
Wetherspoon (J D) PLC730.50 GBX0.00

About Author

Rodney Hobson

Rodney Hobson  is a columnist for and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.

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