1318 Monday 28 January 2019

2018 had many headlines taken up by pot stocks as legalization of marijuana spread through Canada and additional US states, but perhaps the biggest news was taking place in the tobacco market. London traded companies Imperial Brands and British American Tobacco endured a torrid year with the latter losing over half of its value.

There are several reasons for the decline in share price for both companies. Much of the damage came from the exposure that both have to the US markets where the end of the year potential regulatory issues began to appear. Firstly, the FDA announced the ban of flavoured e-cigarettes in convenience stores in an attempt to curb the encouragement of a new generation that go straight to vaping. This news did not affect Imperial Brands so much as they are not currently involved in the e-cigarette market, but BAT own the vape brands Vype, Vue and Glo, so the news hit them far harder. The FDA then followed this up with the possibility of banning menthol cigarettes for the same reason. Again, while both companies were affected, British American Tobacco saw nearly $10bn wiped off their market value on the news due to their exposure to the menthol market in the US. In addition to this, smokers are quitting at rising levels especially due to the taxation both in the US and the UK, although while quitting figures are higher, they pale in comparison to remaining smokers.

In terms of stock value, Imperial Brands is at a 2014 low and BAT currently sits at a 2011 low, which may lead investors to consider them undervalued. But the question they must ask is, are the current levels short-lived due to the FDA’s tobacco clampdown or is this the new norm for the industry? The dividend for both stocks remain strong and are both expected to grow this year. Imperial Brands paid 187.79p last year and are expected to pay 206.54p this year. Likewise, British American Tobacco paid 195.2p and are expected to pay 204p.

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