UK investors stick with tobacco stocks despite ban

Investors in Great Britain are holding their faith in tobacco stocks despite last week's ban on smoking in pubs and clubs in England, betting on good returns as tobacco consumption in countries such as China is expected to grow.

Neil Woodford, manager of one of the UK's biggest unit trusts, the 2.64 billion pound Invesco Perpetual Income fund, has consistently backed tobacco stocks despite previous bans imposed in other European countries.

He currently holds BAT and Imperial Tobacco within its top 10 holdings. In addition to these London-listed shares he has also held US tobacco companies Reynolds American and Altria in the fund since 2000.

Woodford said he had looked to investment opportunities in tobacco stocks either side of the Atlantic as he liked the high level of dividends paid by them.

Key growth markets for tobacco are expected to be in China and other parts of Asia, as well as South America. Typically, these are areas with no prospective bans and less restrictions on advertising.

Woodford conceded that since the start of the year the tobacco industry had been struggling relative to the rest of the market but stressed this was not a result of legislative issues.

It was more likely that risk appetite in the market had increased and that there was a desire among investors to own more cyclical, riskier stocks.

"Part of that is as the popularity of those sorts of stocks increases, so the popularity of steady growth sectors, like the tobacco sector, diminishes."

Stockbroker TD Waterhouse said trading volumes in tobacco stocks had increased after parliament voted in favour of the ban, with trading in stocks like BAT rising.

"In general, investors are wise to the fact that global markets will not be affected by the UK ban," the spokesman said.

"The law does not immediately come into play and there is no clear evidence that the ban will stop people smoking." A statement from Standard & Poor's after the vote said that most tobacco companies were insulated from any immediate impact.

S&P said the ensuing drop in cigarette consumption would be limited to below 10 per cent within the first year of the ban's implementation, and that the corresponding drop in profits would be offset by price increases over the short to medium term, assuming the tax environment remained stable.

S&P also pointed out that while tobacco companies such as Gallaher and Imperial relied on the UK market for respectively 46 per cent and 37 per cent of operating profits, it expected that they would continue to generate strong cash flows.

The independent financial ratings agency added that BAT was probably in the strongest trading position of all its rivals.

"The UK market only contributes marginally to BAT's overall profits, as the group is well diversified," its statement said.

Investment bank Goldman Sachs said in a note last week the ban would have a limited impact on tobacco firms.

"We anticipate a full blanket ban could have a one-off negative impact on UK volume of around 3-5 per cent in the 10 months following implementation by the pub companies, which could take place earlier and more gradually than suggested by the summer 2007 deadline," the note said.

"On balance we see limited impact at the EPS (earnings per share) level for both companies, not more than a negative 2 per cent," Goldman said.

- REUTERS