Cigarette companies have been under the cosh for years as Western governments try to stamp out addiction to cancer sticks. But the anti-smoking lobby has failed on one count – to sufficiently dent the fortunes of tobacco companies on the stock market.
Despite the battering the UK stock market has taken since Friday’s Brexit announcement, shares in tobacco companies have risen. Imperial Brands’ share price is up 4.2 per cent over the last five days, while British American Tobacco has risen 7.3 per cent.
It’s a similar situation on the other side of the Atlantic. Shares in US-listed cigarette manufacturer Altria Group are up 2 per cent in the last five days, with an 18 per cent rise year to date.
Their fortunes contrast sharply with other parts of the stock market which investors perceive as highly vulnerable to the changing political and legal landscape. Investors have dumped shares in banks, insurers and housebuilders, and traders have taken advantage of the uncertainty to create sharp swings in share prices during the day. On Monday, trading in Barclays and RBS was so wild it had to be suspended entirely. Automatic “circuit breakers” kick in when a company’s share price either falls or rises by more than 8 per cent in a day. A five-minute pause is enforced to allow some time to cool off.
The same happened to building companies Taylor Wimpey, Barratt and Berkeley Group, alongside insurer Legal & General and budget airline easyJet.
It’s partly down to the resilience of cigarette sales. “Because of its addictive nature, tobacco is a product that is not sensitive to changes in wealth. Smokers rarely quit because they cannot afford it,” says Adrian Lowcock of Axa Wealth. Pricing power is strong in the industry, which gives a predictability to these companies’ profits.
Cigarette manufacturers are practically immune to recessions and dips in demand, but they have faced a full-frontal assault of regulation aimed at stamping out smoking entirely. Plain, unbranded packaging has been passed into law in Australia, France, Ireland and here in the UK.
Read more: Big tobacco loses plain packaging appeal
Nor can cigarettes be advertised in most of the EU, they’re left to peep out from behind the sliding doors of the supermarkets’ tobacco counters. Australia’s aggressively raising cost per pack, so that by 2020 they’ll be priced at £25 for 20.
There’s also a divestment movement working against tobacco firms. Major investor and insurance company Axa Group recently announced it was selling out of all investments in tobacco companies. The decision was partly on ethical grounds, but it also noted how healthcare is shifting towards disease prevention – which doesn’t bode well for peddlers of cancer-causing goods.
But despite that it’s common knowledge cigarettes harm health (in the West at least), the number of smokers globally hasn’t dropped sharply. Quite the contrary – it’s actually rising, and there are more smokers in the world than ever, at around 1bn people. The rise is coming from developing countries including Bangladesh, China and Russia. Studies show awareness of smoking’s dangers is low in these countries.
“It’s being massively legislated against in the developed world. But people still smoke and these companies are still profitable. They’re getting their growth from the emerging markets,” says Ben Yearsley of Wealth Club.
Some countries have been particularly effective at getting people to quit or not take up the habit in the first place, including Canada, Iceland, Norway and Mexico. But these cultures run counter to a global trend. In developing countries smoking is an aspirational pastime, as it shows a person has not just enough money to feed, clothe and house themselves well, but also to spend on frivolous items too.
There’s also a vast trade in counterfeit cigarettes but, interestingly, evidence shows the tobacco industry has “actively fostered” use of illicit products, according to the World Health Organisation. That’s likely because even smokers of fake cigarettes are better than none, or because these consumers will move onto the real thing during the course of their addiction.
All of these factors mean tobacco companies are still in growth stage – they’re far from dead, despite what you think of smoking’s waning popularity in London.
“The last two big deals Imperial Tobacco did have given them more market share in large European countries. They have more market share and their dividend looks more stable,” says Neil Dwane of Allianz Global Investors. He does say some of his clients are becoming more ethically-focused and are raising concerns about investing in tobacco firms.
But for investors willing to look at it in brute financial terms, it’s the dividend payments which are the big draw. “These companies focus on costs and returning profits to shareholders,” says Lowcock.
The onslaught of regulation means the few global giants in tobacco are not likely to face much competition from start-ups. “Tobacco companies have pricing power. You are not going to have any new entrants to the market because no-one can market their products,” says Darius McDermott of Fund Calibre.
The growing popularity of e-cigarettes, with their sweetie flavours including “cherry crush” and “vivid vanilla”, plus the lack of regulation, isn’t a major threat either. Some are owned by big tobacco companies – Lorillard bought the UK’s SkyCig and US-based Blu – and the others could be bought up, says McDermott.
“It is not over for tobacco companies at all. They have good dividends for investors and if you are looking purely at it as an investment decision, why wouldn’t you invest in tobacco?”