Woodford and Barnett Hit as Tobacco Stocks Slump

British American Tobacco and Imperial Brands' share prices fell on Monday morning after weekend reports the US Food and Drug Administration is considering banning menthol cigarettes

David Brenchley 12 November, 2018 | 1:10PM
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Cigarettes Tobacco Stocks

Tobacco stocks sunk to the bottom of the FTSE 100 leaderboard on Monday morning, after a weekend report that the US Food and Drug Administration (FDA) may ban the sale of menthol cigarettes.

After UK markets had closed on Friday, the Wall Street Journal reported the potential for a ban that could come into effect in around two years’ time. It could take over a year for such a ban to be finalised, the WSJ said, and another for it to become effective.

It is the latest in a line of measures outlined to crackdown on tobacco products, with news in October the US FDA also wishes to reduce the use of e-cigarettes by teenagers.

Friday’s revelations sent shares in UK equity income favourites British American Tobacco (BATS) and Imperial Brands (IMB) spiralling. The former, which is one of the world’s largest makers of menthol cigarettes thanks to its $49 billion acquisition of RJ Reynolds, opened up 11% lower on Monday before settling 9% down. Imperial slumped 4%.

In the year-to-date, BATS is down 40% at 3,042p and Imperial down 16% at 2,658p, capping off a year to forget for investors in the sector. They do currently yield 7% and 6% respectively, though, and today’s lowly ratings could signal an attractive entry point.

Certainly, Morningstar analyst Philip Gorham has five-star ratings on both stocks, suggesting they are significantly undervalued.

Imperial won’t be as aversely affected by any ban as BATS, says Ian Forrest, investment research analyst at The Share Centre, and still rates the stock as a ‘buy’ for medium-risk investors. However, he cautions that BATS will be affected, so his ‘hold’ rating has been place under review.

“It must be emphasised that at this stage these reports are still rumours and they make it clear that it would take some time to draw up the ban and then implement it,” Forrest adds.

Woodford and Barnett Hit

A number of highly rated UK equity income funds have take a hit, with a trio of Mark Barnett-run mandates – the Morningstar Silver Rated Edinburgh Investment Trust (EDIN), Bronze Rated Invesco High Income and Perpetual Income & Growth Trust (PLI) – having high exposure to both.

Meanwhile, Imperial Brands is the top holding in Neil Woodford’s Bronze Rated Equity Income and Income Focus funds at over 8% weightings. BATS also features in Income Focus at just over 3%.

Other funds that count BATS as a prominent holding include Schroders’ UK Alpha Income, Core UK Equity and Income Growth (SCF) offerings. M&G Dividend, SLI UK Equity High Income and Merian UK Opportunities, too.

Imperial features prominently in the Silver Rated M&G Global Dividend fund, run by Stuart Rhodes; Ben Whitmore’s Jupiter UK Special Situations fund; and the Bronze Rated Threadneedle UK Equity Alpha Income fund, run by Richard Colwell.

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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David Brenchley

David Brenchley  is a Reporter for Morningstar.co.uk

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