£8.2bn tobacco lawsuit is no deterrent says City

Adam Hignett
CITY investors and analysts insist that tobacco stocks are still good value for money, despite recent Canadian lawsuits totalling £8.2bn.

The figure comes after the Quebec Superior Court found British American Tobacco (BAT), Rothmans B&H and JTI-MacDonald liable for moral and punitive damages in two lawsuits representing nearly one million smokers on Monday.

One fund retaining confidence in the sector is Woodford Investment Management, where tobacco shares currently comprise 15 per cent of its portfolio. “Litigation risk has been an enduring feature of the tobacco industry for decades, and we do keep a close eye on developments,” explained Woodford fund manager Stephen Lamacraft. “However, tobacco stocks remain a core part of the CF Woodford Equity Income portfolio, and we don’t expect the latest class action to impact their attractive long-term investment prospects,” he added.

While the £8.2bn awarded in damages is a significant sum, it is the long- term impact and any precedent that investors and analysts look out for.

“From a precedent point of view, we believe at this stage the effect will be relatively limited outside of Canada,” said David Hayes of Nomura. “You have to look at these things on a jurisdiction-by-jurisdiction basis.”

Laith Khalaf of Hargreaves Lansdown agreed: “I don’t think this is any cause for immediate panic.” Khalaf, along with other analysts, said the threat of litigation is ever present in the industry, although the tide may be turning. “The more time moves on, the less likely there is to be successful litigation,” he explained, adding that each new generation of smokers is losing the luxury of claiming ignorance about the health impacts of smoking.

Analysts also point out that tobacco shares are currently trading at a 20 to 25 per cent discount relative to other consumer staples. In addition, BAT has already announced its intention to appeal yesterday “on strong legal grounds”, leading to a process that could take several years and lead to significantly smaller damages.