From a market perspective 2022 has been the year when tobacco came back into fashion. In the same way a lapsed smoker might light up a cigarette to calm their nerves, volatile trading has seen investors reach for the likes of British American Tobacco (BAT) despite all the associated ethical concerns.
Today’s update from BAT reveals why. This is a highly cash generative business which, thanks to the addictiveness of its core product, can put up prices without unduly affecting demand.
“Throwing off all this cash means BAT can afford bumper returns to shareholders, giving prospective investors another reason to hold their nose and buy the stock,” said AJ Bell’s Russ Mould.
“However, in a reminder of the regulatory pressure on the industry, a UK Government report looks set to be released today which will argue for an increase in the minimum age at which you can buy tobacco products. Even potentially raising it every year so the current generation of children can never buy cigarettes.
“BAT knows this is the direction of travel and is investing heavily in areas like e-cigarettes and vaping to try and ensure its business isn’t eventually regulated out of existence, particularly in the West.
“However, while cigarettes continue to account for the vast majority of BAT’s revenue and profit, this threat from regulators will remain a live one and any talk of an ESG strategy is likely to be treated with a healthy dose of scepticism.”