Plain paper packaging could burn these 2 FTSE 100 tobacco giants

UK tobacco sales could take a further hit but emerging market should take up the slack, says Harvey Jones.

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Tobacco is the industry that will not die. Health watchdogs have targeted it for years, yet manufacturers remain in rude health. The latest assault is a clampdown on packaging in the UK, due to come into force on 20 May. Could this finally smoke out the industry?

Healthy living

Tobacco companies are strange investments. Everyone now accepts their products are highly addictive and kill. Yet they may remain legal, and it is also legal to invest in these firms. Whether you choose to do so, is down to you.

The strange thing is that everybody knows that health watchdogs are out to get them, by constantly tightening marketing and promotions rules, and bombarding us with health campaigns. In the developed world, the number of smokers has fallen sharply. You might therefore expect big tobacco companies like British American Tobacco (LSE: BATS) and Imperial Brands Group (LSE: IMB) to die a slow death, but they remain in rude health.

Imperial might

Over the last decade, British American Tobacco has delivered seen its share price rise by 238.6%, the ninth best performer on the FTSE 100, which grew just 12.8%, according to AJ Bell. Imperial Brands pulled up in a respectable 20th place, growing 103.5%. Not bad for a dying industry.

Both stocks are also dividend machines, currently yielding 3.25% and 4.09% a year respectively. Over the last decade, each increased their dividend at an annualised compound growth rate of 9.9%. If you had reinvested all your dividends for growth you would have a total 10-year return of an incredible 412.4% from British American Tobacco, and 207.7% from Imperial Brands, thrashing the total 63.9% return from the FTSE 100.

Hide in plain sight

From May, cigarette packs must maintain a standard colour, shape and font, with at least 65% of the surface taken up by health warnings. New research from health organisation Cochrane Review suggests that similar measures slashed the number of smokers in Australia, and could deter 300,000 UK smokers.

Others claim the Australian experience was down to tax hikes rather than standardised packaging and I suspect most investors will not be too worried, because they know the writing is already on the wall. Last year a record 500,000 kicked the habit, according to Public Health England, the highest figure on record. Just 7.2% increasingly beleaguered Britons still smoke, or 16.9% of the population, as e-cigarettes, nicotine patches and gum do their work, and the nudge factor does the rest. What’s another 300,000?

Hot brands

Tobacco companies have kept the buzz by targeting smokers in emerging markets, where British American Tobacco makes 70% of its sales. It has maintained volumes through its successful Global Drive Brands strategy, with Dunhill, Kent, Pall Mall and Lucky Strike enjoying growth of 7.5% over the last year. The fading chance of US litigation is another tailwind. Imperial Brands has boosted its US exposure by purchasing local brands Winston and Kool, and is investing heavily in its growth brands too.

Eventually, emerging market regulators will catch up with both companies, but that is still years away. The plain truth is that both companies are still buys, for those who buy tobacco stocks.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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