2014 has been a hugely positive year for British American Tobacco (LSE: BATS) and Imperial Tobacco (LSE: IMT). Indeed, shares in the two UK-listed tobacco stocks have risen by 8% (British American Tobacco) and 10% (Imperial Tobacco) since the turn of the year, which is well above the FTSE 100s gains of 1% during the same time period. However, with calls for a ban on the indoor use of e-cigarettes gaining momentum, could the future be less prosperous for investors in tobacco stocks?
A Likely Ban
Although people are free to use e-cigarettes pretty much wherever they like at the moment, there are renewed calls from the World Health Organisation to ban their use indoors. Thats because, while e-cigarette vapour is far less harmful than that of normal cigarette smoke, there are fears that it could contain chemicals that cause harm to pregnant women and children. As such, it appears increasingly likely that, over the medium to long term, restrictions will be placed on the use of e-cigarettes that could end up being as stringent as those currently in use for normal cigarettes.
A Game Changer?
The question, though, is whether an indoor ban would be bad news for cigarette companies. Clearly, it is not going to encourage people to smoke more than they would normally, but as we have seen since the indoor ban on normal cigarettes in 2007, sales of e-cigarettes should remain robust in the wake of any ban. Indeed, the proportion of adults who smoke in the UK continues to remain stubbornly high at around 20% and restrictions on tobacco use since 2007 appear to have done little to change this rate. Moreover, declining sales of cigarettes are more likely due to the increasing popularity of e-cigarettes and the increase in counterfeiting, rather than the effects of restrictions on where smokers can consume tobacco products.
In any case, the current valuations of British American Tobacco and Imperial Tobacco appear to price in uncertainty surrounding their e-cigarette products. Despite the e-cigarette industry being worth over $1 billion and becoming increasingly popular among young people, the market is not pricing either company for growth. Indeed, British American Tobacco and Imperial Tobaccos yields provide evidence of their attractive valuations, with them having yields of 4.2% and 5% respectively.
Therefore, even if a ban on the indoor use of e-cigarettes does come into force (which appears likely), British American Tobacco and Imperial Tobaccos current share prices appear to adequately price this in. Moreover, since users of e-cigarettes are addicted to them, sales are unlikely to fall by a significant amount just because of restrictions on where they can be consumed. As a result, both British American Tobacco and Imperial Tobacco appear to be well-placed to benefit from further sales growth in the e-cigarette market, as well as continued price hikes in traditional tobacco products. Both appear to have bright futures.
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Peter Stephensowns shares in Imperial Tobacco and British American Tobacco. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.