The Risks Of Investing In British American Tobacco Plc

Today I am highlighting what you need to know before investing in British American Tobacco (LSE: BATS) (NYSE: BTI.US).

Plain packaging poised to increase

The expansion of plain packaging legislation across the globe remains one of the biggest headaches facing the tobacco industry. Australia introduced plain boxes back in 2011, and Ireland and New Zealand are both in the process of pushing similar measures through the british american tobacco / imperial tobaccolegislative process. And the UK announced just last month that it was bringing draft regulations to the table.

British American Tobacco noted that sales volumes in Australia and New Zealand declined last year, suggesting that the measures may be having an effect, with only cost initiatives and price hikes keeping the firm’s antipodean divisions in the black. Indeed, the company even noted that “illicit trade increased following the introduction of plain packaging” in Australia.

The exact impact of plain-coloured, logo-stripped packaging, combined with stark health warnings emblazoned over the front of cartons, remains a point of much debate. But given the fight put up by the world’s tobacco giants against these laws, the industry certainly seems to fear the effect of such legislation on profits — there is only so far producers can raise cigarette prices before sales become impacted, of course.

Regulatory rope tightens around e-cigs

On top of this, the world’s largest tobacco manufacturers also face the possibility of sales-suffocating legislation affecting their latest red-hot product: the e-cigarette. Fears have circulated over the potential health effects of the chemicals used in vapour-based products, while many have also lobbied that e-cigarettes represent a stepping stone towards traditional tobacco products for many users.

Such concerns prompted scores of scientists and anti-smoking campaigners to appeal to the World Health Organisation (WHO) just last month, calling for a range of measures from plain packaging through to banning their use in public places.

British American Tobacco threw its hat into the e-cig ring with the introduction of its Vype product last year, and has invested vast sums in R&D and advertising to get the product off the ground. Although touted by many as a multi-billion holy grail for the tobacco industry, the prospect of draconian legislation could significantly hamper the sales prospects of this new technology.

On the plus side, however, many believe that the formidable pricing power and popularity of British American Tobacco’s five ‘Global Drive Brands‘ should enable it to continue growing revenues. On top of this, its rising exposure across emerging markets — home to the vast majority of the world’s smokers — also bodes well for long-term earnings growth.

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> Royston does not own shares in British American Tobacco.