Tobacco share prices have been subdued over the last year. Given the damage that tobacco does to people’s health, you don’t hear many complaints when governments get tough with the manufacturers. But as an investor, there’s always something to worry about – fewer customers, higher taxes, advertising bans, the black market – and the new threat of e-cigarettes.
Until now, tobacco firms have remained remarkably resilient in shrugging off these concerns, partly because they’ve kept on increasing prices and also paying bigger dividends. But how long can this last?
E-cigarettes (which give users a smokeless dose of nicotine) are much cheaper than conventional ones, which could wreak havoc in the market. British American Tobacco (LSE: BATS) isn’t taking any chances.
It became the first tobacco company to launch an e-cigarette in July and is rumoured to be selling a nicotine inhaler in future. With regulation coming in from 2016, some doubt whether smaller firms will be able to compete alongside the bigger ones, which puts BAT at an advantage. With decent exposure to Asia, where smoker numbers are still growing, it may outperform its Western rivals.
At 3,276p, the shares yield 4.4%, with dividends expected to grow by 7%-8% over the next couple of years. Tobacco shares aren’t for everyone and look riskier than they were, but BAT still looks a decent bet for income-seekers.
Verdict: buy