Tobacco industry rides out recession with rising share prices

The financial crisis has claimed many scalps - governments, banks, dozens of con artists - but it gave an impetus to the surprise of one of the most controversial sectors in the UK, the tobacco industry.

Share prices stalwarts such as British American Tobacco and Imperial Tobacco were a record for the last 12 months - from BAT doubled to 30 pounds, as investors fled to the banks and retail stocks in search of safe haven.

Never mind that cigarettes kill six million people a year, and the industry is faced with the onslaught from health campaigns that want to repay its commercial viability. On world markets, tobacco companies were among the largest recipients of financial dislocation in the developed world.

Cigarette manufacturers are considering brokers as defensive stocks. They offer the holy grail of predictable dividend yield of about 4% or more, much higher than the interest you receive from the bank, as well as steady growth in revenue, which is fed through an increase in stock prices, the provision of capital gains.

Debu Martin, an analyst at Investec Securities, said: “These stocks are about closest you can get a bond on the stock market is that they offer a relatively stable source of income, not easy to find in the space of action.”

You may think it is puzzling industry so successful, when sales fell by about 2% per year (with the exception of China, which is dominated by state monopolies), fewer people are smoking in developed countries and the government always slapping higher taxes on producers.

Analysts say that companies have found an elegant solution to this problem. Not only did they pass the tax increase for smokers, as expected, they also impose an additional price increases to offset losses from sales that are inevitable whenever excise taxes were raised.

More tax burden of tobacco provides multinational corporations with a lid to increase profits and return on pushing that critics say is too high a rise in prices. Protests from the crack smokers are, because they are regarded as deserving of public sympathy.

Business Math explains how companies such as Imperial Tobacco, which has about 40% of the UK market, increased operating margin in 15 years from 45% to 65%. Debu says that the margins are high by the standards of the stock market and there are no signs of abating.

Tobacco companies have escaped the shadow of the 1990s, when a lawsuit in the U.S. hanging over the shares. Branch settlement of claims in 1998 began to change the mood.

Michael Prideaux, Director of Corporate and Regulatory Affairs at BAT, admits that “life is good at the moment,” and blows a continuous record of firm growth in profitability in recent years.
Rather than dwell on the stellar performance of the stock price BAT, it focuses on the basics of business. “The real positive was the opening of Eastern and Central Europe,” he says, where last year, BAT generated revenue of £ 1,7 billion and an operating profit of £ 360m.

He disagreed with the campaign, which say, the industry is only growing because of weak regulation in developing countries where mobile phone up and up is not so mobile, are the largest consumers of BAT brands - such as Dunhill, Kent and Pall Mall.

“The situation is very tight everywhere, you’ll be surprised at how strict they are in a country such as Djibouti,” he says. “It’s a myth that developing economies are soft touches.”
This assertion is hotly disputed anti-smoking groups such as Ash (Action on Smoking and Health).

Prideaux admits BAT focuses on the development of regions “, but only because in countries such as India, rising per capita incomes and there is a growing middle class … so that the growth potential higher than that on offer in more mature markets.”

BAT figures show, the Asia-Pacific region as the biggest contribution to profits and revenue in 2010 to 1.3 billion pounds and 3.8 billion pounds, respectively, to Western Europe and Africa / Middle East.

How long can share that prices remain strong? The question intrigues investors town, so with some anxiety, that last year they had read the note written Adam Spielman, analyst at Citigroup, entitled: “What if the last smoker throws in 2050”

Spielmann does not include the problem in the short term, as pricing remains strong. But maybe in 20 or 30 or 40 years, who knows?

“There will come a time when the percentage decline is that prices can not provide stable from above (income) of the line,” he says. “For example, if we assume that the industry will not be able to determine the price up enough to compensate for the decline of, say, 6% -7% … that leads to the pricing mechanism will not be able to maintain profit pool in cigarettes in the past in the UK in 2020 city (the proportion of British adults smoked which has fallen from 52% in 1960 to 20% in 2008).

“In a broader sense, a similar pattern will hold in many other European countries, Canada and Australia.”

He argues that the evidence of increasing rate of descent, so that there is a real opportunity - within a likely scenario -. “There will be no smokers left in many developed countries,” which in 2050
Then, Spielmann drops another bombshell: “Smoking trends and regulations in emerging markets, often only five to 10 years in developed markets.”

There is the prospect of the industry in the direction of extinction. “No one can know how it ends,” insists Spielmann. But until then, the tobacco industry remains one of the few recessions these country offenders.

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