British American Tobacco and Imperial Brands: could this be the future?

Shares in British American Tobacco plc (LON: BATS) and Imperial Brands plc (LON: IMB) have taken a beating over the last two years. Could this niche product help them turn things around?

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It’s no secret the tobacco sector is going through an extremely challenging period right now. Smoking rates are declining all over the world which is putting pressure on revenues and profits and, as a result, tobacco stocks have been hit hard.

Over the last two years, British American Tobacco (LSE: BATS) shares have fallen 49%, while rival Imperial Brands (LSE: IMB) is down 46%. These are no doubt large falls, particularly when you consider that, only a few years ago, both stocks were considered to be dependable blue-chip dividend stocks. 

To offset the decline in cigarette volumes,  both FTSE 100 companies have been developing new innovative products that are considered less harmful to consumers, such as tobacco heating products and vapour products. BATS has its portfolio of ‘potentially reduced-risk products’, while Imperial has its portfolio of ‘next-generation products’. Both companies are seeing good results here, even if progress is a little slow.

However recently, I’ve been wondering if a different product is actually the long-term solution to the tobacco giants’ woes. I’m talking about cannabis.

Attitudes towards cannabis are changing

Now, that may sound crazy at first. After all, here in the UK, cannabis is illegal. Yet around the world, attitudes towards its use are changing dramatically.

For example, just look at the US, where the cannabis industry is booming. There, 10 states have legalised recreational marijuana use, while 33 states have legalised medicinal use. Meanwhile, in Canada, recreational and medicinal cannabis are legal across the whole country.

There are also a large number of countries within Europe that have legalised cannabis for medical use. These include Switzerland, Portugal, Italy, and Germany. Having long been considered a taboo industry, cannabis is clearly going mainstream.

Mega market

And it’s a massive market. While global sales are expected to come in at around $17bn this year, according to some analysts sales could potentially grow to over $150bn in the years ahead. To put that number in perspective, British American Tobacco generated sales of around $32bn last year. If tobacco giants are looking for a genuine growth driver, cannabis could the solution.

It’s already happening

What I think is interesting about this is that tobacco companies are already testing the cannabis market.For example, US tobacco group Altria – the owner of Marlboro cigarettes – recently splashed out $1.8bn to acquire a 45% stake in cannabis stock Cronos, with the ability to exercise warrants that could up its stake to 55%.

Closer to home, Imperial Brands announced last year that it had made a small investment in UK biotech company Oxford Cannabinoid Technologies (OCT) through a subsidiary. Imperial CEO Alison Cooper has said that cannabis is “an interesting place to explore.” It’s early days, yet there definitely appears to be some interest in this burgeoning sector from the tobacco companies.

Watch this space

Ultimately, I think the tobacco/cannabis story is worth following closely. FTSE 100 tobacco stocks aren’t going to turn into cannabis stocks overnight. However, I’m convinced cannabis could potentially provide another growth angle for the tobacco giants in the future. As a result, I wouldn’t write off British American Tobacco or Imperial Brands just yet.

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.

Edward Sheldon owns shares in Imperial Brands. 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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