British American Tobacco Group plc Faces £5.5bn Fine: Is BP plc A Safer Buy?

Does liability ruling make British American Tobacco Group plc (LON:BATS) riskier than BP plc (LON:BP) for dividend investors?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Shares in cigarette giant British American Tobacco Group (LSE: BATS) fell by 2.5% this morning, after the firm said it could have to pay damages of CAD$10.4bn (£5.5bn) to smokers in Canada.

To put this fine in context, BAT’s operating profit was £4.5bn in 2014.

Inflation Is Coming

Inflation is out of control, and people are running scared. But right now there’s one thing we believe Investors should avoid doing at all costs… and that’s doing nothing. That’s why we’ve put together a special report that uncovers 3 of our top UK and US share ideas to try and best hedge against inflation… and better still, we’re giving it away completely FREE today!

Click here to claim your copy now!

The ruling is the outcome of a ten-year legal case against BAT’s Canadian subsidiary, Imperial Tobacco Canada, along with the Canadian subsidiaries of Philip Morris International and Japan Tobacco International.

The case was brought by two groups of smokers. The first were diagnosed with lung, throat and laryngeal cancer or emphysema before 12 March 2012, having smoked for at least 12 pack-years. The second group were smokers addicted to nicotine from before September 1998 until at least 21 February 2005.

(A pack-year is equivalent to smoking one pack of 20 cigarettes every day for a year.)

Will BAT have to pay?

This isn’t the first time Big Tobacco has faced damages of this kind. The tobacco industry has a strong track record of overturning or reducing such penalties on appeal.

This morning, BAT confirmed that Imperial Tobacco Canada will seek to appeal the fine. The judge in the case appears to have expected this outcome. He also ruled that should the firms appeal, they would have to make an interim payment of CAD$1.13bn, of which Imperial Tobacco Canada’s shares would be $743m.

However, BAT said this morning that Imperial Tobacco Canada will also seek to stay this order, and does not intend to make any payments in the meantime.

The tobacco industry’s approach to these rulings has always been to appeal and delay as much as possible. This case has, after all, already been running for ten years. Many of the original plaintiffs will now be dead.

The reason the tobacco firms always fight is to reduce the risk that a rare successful action will open the door to an unaffordable flood of compensation claims. Today’s ruling suggests this risk remains valid.

A better choice?

Could energy firms such as BP (LSE: BP) (NYSE: BP.US) actually be less risky than tobacco stocks?

Although BP may have to pay a fine of between $5bn and $20bn for the Gulf of Mexico oil spill, this was essentially a one-off.

In contrast, the liability risks facing tobacco firms are only likely to get worse. Even China, the world’s largest tobacco market, is now starting to implement anti-smoking measures.

What’s more, the tobacco market is in structural decline. BAT’s cigarette volumes have fallen by almost 8% since 2009. Global oil and gas demand is expected to continue rise for the foreseeable future.

BP vs BAT

Most people accept that tobacco is dangerous and oil and gas damage the environment. Yet the big firms which produce them have been great investments and enjoy strong valuations:

 

BAT

BP

2015 forecast P/E

16.9

17.2

2015 forecast yield

4.4%

5.9%

Expectations of future profit growth remain high.

BP’s earnings per share are expected to bounce back and rise by 31% in 2016, putting the oil firm’s shares on a 2016 P/E of only 13.

BAT is expected to increase earnings and the dividend by 5-7% in 2016.

Ethical views may affect your choice, but in pure investment terms, I believe both BP and BAT are attractive income buys at today’s prices.

More on Investing Articles

Playful senior couple in aprons dancing and smiling while preparing healthy dinner at home
Investing Articles

Best British dividend stocks for July

We asked our freelance writers to share the top income stocks they’d buy in July, which included Dividend Aristocrats and…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

How I’d apply the Warren Buffett method to buying shares

Learning from billionaire investor Warren Buffett, our writer explains his own approach to investing in shares for his portfolio.

Read more »

pensive bearded business man sitting on chair looking out of the window
Investing Articles

This dividend share yields under 1% — but I’d still buy it

This dividend share has a low yield. So why would our writer consider adding it to his income portfolio?

Read more »

Young lady working from home office during coronavirus pandemic.
Investing Articles

Looking for a good share to buy? Here’s how I do it

Here are two approaches our writer uses when hunting for a good share to buy for his portfolio to aim…

Read more »

man in shirt using computer and smiling while working in the office
Investing Articles

One cheap FTSE 100 share I’d buy for a new bull market

This FTSE 100 share is unloved and starting to look seriously cheap, says Roland Head.

Read more »

Young brown woman delighted with what she sees on her screen
Investing Articles

How I’d invest £500 in UK shares in 2022

Investing a small amount of capital in UK shares can result in high commission costs. Zaven Boyrazian explains how to…

Read more »

Black woman using loudspeaker to be heard
Investing Articles

2 battered FTSE dividend stocks to buy in July!

I'm still searching the FTSE 100 for the best bargains to buy. I think these two big dividend shares are…

Read more »

Woman pulling baffled face
Investing Articles

Can I trust Lloyds’ 6.1% dividend yield?

The Lloyds' share price has sunk in 2022, causing the bank's dividend yield to leap. But can I really trust…

Read more »