Why British American Tobacco plc Should Not Be In Your 2014 ISA

It’s ISA time again in April, and we’ll have a whole new allowance of £11,760 — that’s the amount we can invest in shares over the following 12 months and protect our gains from taxes.

Strong record

But what kind of shares should we be protecting with such a wrapper? How about one that has recorded rises in earnings per share (EPS) for each of the past five years and has increased its dividend every year too? And one that, while it has a flat year forecast this year, has growth penciled in again for 2015 — and has its predicted dividend yield rising to 4.8% by 2015 too?

Well, if it’s British American Tobacco (LSE: BATS) (NYSE: BTI.US) I’d say no, and here’s why…

Buy and forget

The thing is, for an ISA I think the best kind of shares you can buy are those with a very long-term horizon — the kind you can hopefully just tuck away and forget, and come back to in two or three decades and enjoy the gains. But over the next 20 years, I don’t see British American Tobacco being one of them — and the signs of long-term decline are already here.

british american tobacco / imperial tobaccoTake those past earnings rises, for example — they’ve been declining. In 2009, we saw a 19% EPS rise, but by two years later it was down to 11%, and by 2013 down further to 5%. And forecasts are currently suggesting just 8% over the next two years combined.

Falling consumption

The problem for the industry is that people are smoking less and less of the noxious filth.

In results for the year ended 31 December 2013, British American reported a fall in cigarette volumes of 2.7% to 676 billion — albeit still a frighteningly large number. Overall tobacco volumes dropped 2.6%.

Profits were up, but that was due to the company’s shifting focus to its higher-margin premium brands and its more profitable key markets. That’s an effective strategy for now, but if the turnaround point for actual consumption volumes really has been reached, it’s not going to produce long-term growth.

Same across the industry

It’s not new either — a year previously, cigarette volumes were down 1.6% to 694 billion, and again it was increased sales of top brands like Dunhill that kept profits going.

The picture is the same at rival Imperial Tobacco, which revealed a 5% decline in tobacco volumes in its first-quarter update in February.

And there’s really no need to take the risk anyway, not with so many top FTSE 100 shares that do have healthy-looking 20-year horizons ahead of them.

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Alan does not own any shares in British American Tobacco or Imperial Tobacco.