MARKET COMMENT
High Yield Tobacco Looks Healthy For 2002

By Maynard Paton (TMFMayn)
December 14, 2001

Carburton Street, London -- The ethical nature of the tobacco industry is often put into question. However, there's no doubting the solid share price performances from the tobacco companies this year. Indeed, even with the sector's recent outperformance, anybody considering giving up smoking in the New Year could do well to direct their saved cigarette pennies into tobacco shares.

This time last year, we highlighted the merits of the three UK tobacco firms. We wrote: "All three look a safe bet for those turning from tobacco customer to tobacco shareholder for 2001." One year on, here's how each company's share price has performed.

 Company                    Share Price    Share Price    Gain
                             27/12/00       14/12/00      (%)

 British American Tobacco     508p           561.5p      +10.5
 Gallaher                     434p           443p         +2.1
 Imperial Tobacco             705p           875p        +24.1 

Over that time, the FTSE 100 has fallen 18.4%. Furthermore, the above figures exclude dividends, a factor which would further improve the relative outperformance of the tobacco shares.

Here's how the three companies presently stand in terms of valuation.

 Company                   Prospective       Prospective
                              P/E          dividend yield

 British American Tobacco     8.9               5.6%
 Gallaher                    10.0               5.8%
 Imperial Tobacco            11.1               4.3% 

Low growth, litigation threats and ethical concerns provide each company with relatively low stock market ratings. However, the steady, stable nature of the industry means shareholders receive few untoward profit surprises. Both Imperial Tobacco (LSE: IMT) and Gallaher (LSE: GLH) are forecast to produce earnings growth of around 9% over the next year or two. Meanwhile, British American Tobacco (LSE: BATS) is expected to see profit growth of just 4% in the near-term.

While all three companies offer above-average and well covered dividend yields, Gallaher looks the pick of the bunch for the income investor at present. For the record, its low rating has not been helped by concerns stemming from the somewhat large, and pricey, acquisition of Austria Tabak. Overall, with those decent yields and a subdued global economy, all three companies still remain a safe bet for those turning from tobacco customer to tobacco shareholder for 2002.

More: British American Tobacco discussion board | Gallaher discussion board | Imperial Tobacco discussion board | Stopping Smoking discussion board

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