Is ‘vaping illness’ a sign British American Tobacco’s future is going up in smoke? 

British American Tobacco plc (LSE:BATS) is an excellent dividend stock for income-seeking investors. However, concerns about the health risks of e-cigarettes could be denting the company’s growth story.

| 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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Big Tobacco has had an incredible run. Its products were always addictive and easy to manufacture. Over time, as the health risks of smoking became undeniable, governments across the world opted to clamp down and tightly regulate the industry rather than ban the products altogether. 

The confluence of these factors made the tobacco industry one of the most concentrated and profitable industries on the planet. The aggregate profits for all major tobacco producers across the world exceeded US$62.27bn (£49.6bn) in 2015, the latest year with full records. 

In 2016, the five largest producers shipped 2.27tn cigarettes, which equates to more than 300 units for every human alive at the time. One of those large producers is London-based British American Tobacco (LSE:BATS), which reported £9.3bn in operating income last year.

Like other Big Tobacco leaders, BAT has managed to avoid death and taxes to create profits. A steady decline in the number of smokers in the developed world has been offset by a growing number of new smokers in emerging markets, particularly Asia. 

However, the industry understands that growth in the Asian market will eventually saturate like the rest of the world, which is why they have turned to a new source of potential growth – e-cigarettes, or vapes. 

These vaping products, or ‘new category’ products as BAT likes to call them, accounted for more than £1.8bn in sales last year. The company cut 2,300 staff earlier this year and has initiated a restructuring to focus on this segment and to double the sales of vaping-related items by 2024.  

Investors were so thrilled by the company injecting some fresh blood into its already lucrative business that they pushed the stock up by nearly a third earlier this year. 

However, I believe it’s too early for this sort of optimism. Not much is known about the long-term health consequences of vaping, and this year we started to see signs that this innovative new category may not be the panacea tobacco investors were hoping for. 

According to the Centers for Disease Control and Prevention (CDC), a new form of lung disease linked to the use of vaping products has already claimed eight lives and affected 530 people across the US. This week, Canada reported its first official case of vaping illness, when a teenager was put on life support. By Wednesday, the Indian government had announced a blanket ban on all vaping products across the country.

I wouldn’t be surprised if more cases and more bans emerged in the years ahead. Governments may be compelled to step in and nip this issue in the bud. That could mean BAT’s hopes of growth could be going up in smoke.

Nonetheless, BAT is far from being a doomed company or a bad investment, in my opinion. As I mentioned in my previous article, more than a billion people are still addicted to tobacco and could help cover the 7% dividend yield BAT currently offers, for decades to come. 

Foolish takeaway

I believe BAT is still an excellent dividend stock for income-seeking investors. However, concerns about the health risks of e-cigarettes could be denting the company’s growth story.

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.

VisheshR has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

More on Investing Articles

Investing Articles

Here’s how investing £250 a month could bag me over £10K in passive income annually

This Fool breaks down how she would go about building a passive income stream worth over £10,000 annually to enjoy…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

I’d snap this FTSE 250 stock up in a heartbeat for juicy returns and growth!

Sumayya Mansoor explains why this FTSE 250 property stock is firmly on her radar as she looks to buy stocks…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

1 dirt-cheap FTSE 100 stock investors should consider buying in June

The FTSE 100 is littered with bargains, according to our writer. She explains why investors should be taking a closer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

The Legal & General share price has gone nowhere. Why?

The Legal & General share price has performed much worse than the the FTSE 100 over the past five years.…

Read more »

Investing Articles

Where will the BT share price go in the next 12 months? Here’s what the experts say

The BT share price has been sliding for years. But after the latest set of results, it looks like the…

Read more »

Investing Articles

Are National Grid shares now a brilliant bargain?

National Grid shares look exceptionally cheap following last week's selloff. Is now the time to buy the FTSE 100 firm…

Read more »

Happy young female stock-picker in a cafe
Investing Articles

Up more than 15%! — this small-cap company is delivering phenomenal dividend growth

There’s more good news in this company’s interim report and it may be shaping up as a decent dividend growth…

Read more »

Electric cars charging at a charging station
Investing Articles

Big news for Tesla stock investors!

Tesla has just quietly dropped a key target it set for itself just a few years ago. What does this…

Read more »