Rishi Sunak might have just killed tobacco stocks. The Prime Minister announced last week a rising age restriction on cigarettes. Anyone 14 years or younger will never buy a cigarette legally. That’s the plan, anyway.
This ban could be the beginning of the end for tobacco stocks. If it all amounts to nothing, however, now might be a rare opportunity to pick up cheap shares in the big tobacco firms.
Here’s what I think will happen.
Firstly, I am a British American Tobacco (LSE: BATS) shareholder so I do have a dog in this fight. The stock, along with the other FTSE 100 tobacco firm, Imperial Brands (LSE: IMB), dropped on the news.
That both stocks only dropped 2%-3% tells a story. A couple of percent is nothing, all in a day’s work in the stock market. Both stocks have suffered falls twice as big lately. What’s going on, then?
Sneak an election
Simply, investors aren’t selling. They don’t seem frightened. I suspect they think there’s little chance this law comes into effect.
Rishi Sunak could leave Downing Street sooner rather than later. He’s lagging 20% behind his Labour counterpart in the polls. With an election likely next year, Sunak’s tobacco law looks unlikely.
And even if Sunak and his party deliver a sparkling turnaround and sneak the general election, it still wouldn’t crater the tobacco stocks. The reason?
The domino effect
Smoking in this country is a small part of these global businesses. UK cigarette sales form only a small part of tobacco firms’ revenue. A British ban simply won’t make a dent in revenue.
Age restrictions may catch on, of course. An effective tobacco ban that shows provably better health outcomes might look attractive for other countries too.
New Zealand were the first to announce this kind of plan and the UK could be one in a long line of dominos. If the whole world chooses to ban cigarettes, I would expect it to have a big impact on the tobacco stocks. Does this mean I’m selling?
In short, no I won’t. I accept that the long-term decline in cigarettes will happen, whether through regulation or simply consumers making healthier choices. But a decline in nicotine looks less likely.
In developed countries, vapes and pouches have replaced much of the demand for ciggies. They are healthier, and of course, the big tobacco firms are keen to corner the market. British American Tobacco’s revenue is already around 15% from “non-combustibles”.
In the short term, we might see some change. I don’t think Sunak will still be Prime Minister in a year’s time, but there is the chance that Labour win the election and bring in the same or a similar policy.
The risk does mean that the stocks face a lot of uncertainty. They are certainly cheap, with British American Tobacco and Imperial both trading at under 10 times earnings, but it’s an opportunity that comes with risks. I’m not tempted to buy more myself.