Plain paper packaging could burn these 2 FTSE 100 tobacco giants
Tobacco is the industry that will not die. Health watchdogs have targeted itforyears, yet manufacturersremain in rude health. The latest assault is a clampdown onpackaging in the UK, due to come into force on 20 May. Could this finally smoke out the industry?
Healthy living
Tobacco companies arestrange investments. Everyone now accepts their products are highly addictive and kill. Yet theymay remain legal, and it is also legal to invest in these firms. Whether you chooseto do so, is down to you.
The strange thing is that everybody knowsthat health watchdogs are out to get them, by constantly tightening marketing and promotions rules, and bombarding us with health campaigns. In the developed world, the number of smokers has fallen sharply. You might therefore expect big tobacco companies like British American Tobacco (LSE: BATS) and Imperial Brands Group (LSE: IMB) to diea slow death, but they remain in rude health.
Imperial might
Over the last decade, British American Tobacco has delivered seen its share price rise by238.6%, the ninth best performer on the FTSE 100, which grew just 12.8%, according to AJ Bell. Imperial Brands pulled upin a respectable 20th place, growing 103.5%. Not bad for a dying industry.
Both stocks are also dividend machines, currently yielding 3.25% and 4.09% a year respectively. Over the last decade, eachincreased their dividend at an annualised compound growth rate of 9.9%. If you had reinvested all your dividends for growth you would have a total 10-year return of an incredible 412.4% from British American Tobacco, and 207.7% from Imperial Brands, thrashing the total 63.9% returnfrom the FTSE 100.
Hide in plain sight
From May,cigarette packs must maintain a standard colour, shape and font, with at least 65% of the surface taken up by healthwarnings. New research fromhealth organisation Cochrane Review suggeststhat similar measures slashed the number of smokers in Australia, and could deter300,000 UK smokers.
Others claim the Australian experience was down to tax hikes rather than standardised packagingandI suspect most investors will not be too worried, because they know thewriting is already on the wall. Last year a record 500,000 kicked the habit, according to Public Health England, the highest figure on record. Just 7.2% increasingly beleaguered Britons stillsmoke, or16.9% of thepopulation, ase-cigarettes, nicotine patches and gum do their work, and the nudge factor does the rest. Whats another 300,000?
Hot brands
Tobacco companies have kept the buzz bytargeting smokers in emerging markets, where British American Tobacco makes70% of its sales. It has maintained volumes through its successful Global Drive Brands strategy, with Dunhill, Kent, Pall Mall and Lucky Strike enjoyinggrowth of 7.5% over the last year. The fading chance of US litigation is another tailwind. Imperial Brandshas boosted its US exposure bypurchasing local brands Winston and Kool, and is investing heavily in its growth brandstoo.
Eventually, emerging market regulators will catch up with both companies, but that is still years away. The plain truth is that both companies are still buys, for those who buy tobacco stocks.
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