FTSE 100 tobacco giant British American Tobacco (BATS) has underlined the challenges facing the industry with its latest market update. Still investors were reassured by forecasts for the full year, where the company is expected to grow revenue and profits despite global tobacco sales falling and the vaping backlash in full swing in its key US market.
The company’s shares rose 2% or 62.5p to £30.48 after the update, and they are up 23% this year despite a tough year for the tobacco industry.
The widespread popularity of vaping was expected to help tobacco giants transition away from cigarettes – Philip Morris’s slogan is “Delivering a smoke-free future” – but the scale of the backlash has unsettled investors. British American’s market update reveals that growth in “Combustibles”, ie. traditional tobacco cigarettes, will more than make up for a slowing US vaping market. Still, BATs is growing market share for its key e-cigarette brands, which include Vuse in the US, Vype in the UK and France, where it has a near-20% market share.
Rival Imperial Brands (IMB) has yet to announce its new chief executive after Alison Cooper announced she will be stepping down. Its share price is down from £23.82 at the start of the year to £17.11, a fall of 28%.
Leaving aside the moral and health argument against tobacco investing, which we have discussed in detail before, both Imperial Tobacco and British American Tobacco are considered as “wide moat” stocks by Morningstar analysts. This strong competitive advantage is down to the strength of the companies’ brands, analysts argue, and this is backed up by high dividend yields. Due to share price weakness, Imperial’s yield has pushed up above 10% even with changes to its dividend policies. BATs is fourth on our list of the FTSE’s highest dividends with a yield above 7%.
Vaping Backlash
British American Tobacco is rated as a 5-star stock by Morningstar sector analyst Philip Gorham, which means the shares are significantly undervalued. “Trump's proposal significantly accelerates US regulation and could decimate the category in a few years. We are retaining our fair value estimates for all companies under our tobacco coverage until we know more about the extent and timing of any regulation,” he said after the President’s plans were unveiled in September.
The latest update from BATs puts a positive spin on these restrictions: “We believe that the issues around vaping in the US should lead to a better and stronger regulatory environment in which we are well placed to succeed,” says chief executive Jack Bowles.
Vaping has come under intense scrutiny this year in the United States are a number of e-cigarette users died and many have complained of breathing problems. President Trump unveiled plans to ban the sale of flavoured e-cigarettes in September amid concerns from health lobbyists that younger people are being drawn into vaping through these products. Just this week New York City banned flavoured e-cigarettes. As we wrote in September, fears of a crackdown in US states where vaping-related deaths have occurred mean wholesalers and retailers have stopped ordering e-cigarette products. In some US states such as Michigan and Massachusetts, vaping products have been removed from sale completely.
