Is tobacco still a good idea for investors – MoneyWeek

Foraslongasithasbeenbadforyourhealth,tobaccohasbeengoodforbusiness。

Thebigcompanieshavebeenmakingsteadyprofitsandpayingoutrisingdividendsforyears,butthegoodtimesarefastcomingtoanend。

Asgovernmentscrackdownonsmokingbecauseofthehighcostofmedicalcare,andpublicsmokingbansbecomemorecommonplacearoundtheglobe,howlongcanthiscontinuetobethecase?

Areshareholdersintobaccocompaniesabouttohavearudeawakening?

MichaelSmithofJPMorganthinksso。

Afterfouryears’outperformance,relativetotheoverallmarket,hebelievestheglobaltobaccosectorisabouttoenteraperiodofunderperformance。

Newhealthwarninglabelsontobaccoaredamagingthevalueofbrandshavingaanoticeonyourproductthateffectivelysays“ifyoudothisyoumightdie”ishardlygoodforbrandloyalty。

Therateofincreaseinglobalexcisetaxandso-calledsintaxesisaccelerating。

Publicsmokingbansaresteadilygaining“politicalmomentum”。

Overall,regulationisbecomingoneofthe“key”driversofindustrycashflow。

Consider,forexample,theeffectthatapublicsmokingbanhashadinIreland。

CigarettesalesintheIrishRepublichave“plummeted”inthesixmonthssincesmokingwasbannedinofficesinMarch,saysSeanO’NeillandIngridMansellinTheTimes。

SmokersinIrelandwillpurchase500mfewercigarettesin2004thantheydidlastyearifthedeclinecontinuesatthecurrentrate。

Gallaher,whichhashalfoftheIrishmarket,saysitsold100mfewercigarettesinthefirstsixmonthsofthisyearcomparedwiththesameperiodof2003。

Addtothisthegrowinghostilitytosmokinginpubsandbars,pointsoutMichaelJivkovinTheIndependent。

MitchellsButlers,owneroftheAllBarOnechainamongothers,hasunveiledplanstotransformitsoutletsinto“primarilynon-smokingventures”,withrestrictedand“progressivelyreduced”smokingareas。

Smokingwillbebannedatthebarbytheendofnextyearand,withinfiveyears,80%ofallfloorspacewillbenon-smoking。

BothGallaherandImperialTobacco’sprofitssaggedonthenews。

TheyfellagainwhenJohnReid,theUKhealthsecretary,indicatedthattheGovernmentwouldsoonbetakingactiontopreventsmokinginallpublicplaces。

Nowonder。

Aslongasregulationrises,revenueswillfall。

Butthepossibilityoflosingrevenueisonlythestartofthesector’sproblems。

There’salsoacostproblem。

TheUSDepartmentofJusticeisseeking$280bnwhich,itsays,wasearnedthroughfraudbytobaccocompaniesbecausethedangersofsmokingwerecoveredup,saysLexintheFT。

Ifitmanagestogetthepayouts,theycould“effectivelybankrupt”theentireindustry。

Thatseemsunlikely,butitisentirelypossiblethattherewillbeamiddle-groundoutcomethatdoesn’tquitethreatencompanysurvival,butdoeshitthesectorhardenoughtoaffectits“creditworthiness”。

Ifso,theworstaffectedofthebigtobaccocompanieswouldbeAltria(formerlyPhilipMorris)becauseithasthebiggestshareoftheUSmarket。

Thebondmarket,historicallyabetterjudgeofriskthantheequitymarket,isnervous:Altria’sbondsarealreadytradinginlinewithjunkbonds。

Equityinvestorsshouldbenervoustoo。

Overall,theonlyrealargumentforholdingtobaccostockstodayistheyieldstheyoffer,buteventhatisn’treallyenough。

NotonlyaretheyieldsonthebigsharesseriouslyatrisknotethatMorganStanleylists11legaleventsforthesectorfortheremainderofOctoberalonebutyoucangetbettershareselsewherewithouttheheadache。

TimPriceofAnsbacherWealthsuggeststhefollowing:BritishVita(4。

76%);HSBC(4%);KeldaGroup(5。

08%);SevernTrent(5。

38%)andUnitedUtilities(8。

06%)。

NakedTextNakedText