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Why I’m A Buyer Of British American Tobacco plc

The links between smoking, death, the NHS and duty have always fascinated me.

Of course, I am approaching this topic as an investor and fully appreciate from my own experiences the tragedies that smoking can cause, so this article certainly does not seek to gloss over those painful issues.

However, the government clearly takes with one hand from tobacco and gives back with another. The ‘taking’ is in the form of duty, with the Exchequer receiving billions of pounds per year from the sale of tobacco. The ‘giving’ is, of course, the treatment provided under the NHS to people who are suffering from various illnesses and diseases caused by smoking.

Indeed, it has often puzzled me why the government does not merely increase duty so as to increase income, providing it with not only a healthier group of citizens but with more money to spend on the treatment of smokers via the NHS.

The problem, though, with increasing duty is smuggling. Indeed, it is estimated that one in seven cigarettes in Ireland and one in 10 cigarettes in the UK are illicit.

Therefore, tobacco companies such as British American Tobacco (LSE: BATS) (NYSE: BTI.US) are seeking lower duties so as to reduce the attraction of illicit cigarettes to consumers.

Of course, for every 10 cigarettes smoked in the UK, nine are perfectly legitimate. So, as an investor, I remain bullish about the prospects for companies such as British American Tobacco.

As well as the strong portfolio of brands the company owns, it is at the forefront of the e-cigarette ‘revolution’. In case you don’t know what e-cigarettes are, they are essentially water vapour that contains nicotine and which is designed to look (and taste) like a ‘normal’ cigarette.

E-cigarettes seem to be gaining popularity, especially among young people, and I believe they present an opportunity for companies such as British American Tobacco to grow volumes, sales and, ultimately, profits in the long run — especially in developed markets such as the UK, where regulation is making smoking more difficult and less popular.

In addition, a big attraction of British American Tobacco is the stability of its earnings and the impressive dividend it pays.

Shares currently yield 4.1%, providing income-seeking investors like me with a far more attractive return than a bank account and offering significant headroom should inflation jump higher in the coming months.

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> Peter does not own shares in British American Tobacco.