For several years traditional tobacco companies have been under pressure for failing to deliver on growth expectations for next-generation products such as vaping. Expectations were too high, competition was tough with many new entrants to the market, and political and regulatory bodies were coming down hard on the space.
“A bit like the oil industry, tobacco companies were kicked into the corner and ignored by a large chunk of the market in the belief their core product categories would fade into oblivion and the transition to a new way of life would not be easy,” says AJ Bell’s Russ Mould.
“Perhaps these critics were too harsh. Oil has bounced back in price and tobacco companies are enjoying a pick-up in earnings. Of note, British American Tobacco has upgraded its earnings guidance after saying smokers continue to switch to less harmful alternatives. The company will be hoping that customers stay loyal once it has hooked them in.
“Others in the sector are also looking more hopeful. For example, Imperial Brands’ chief executive Stefan Bomhard recently commented about his company’s stabilising market share in tobacco in key markets, lower losses from next generation products thanks to more controlled investment and firm pricing also offered encouragement.
“While trading in the tobacco sector is looking more positive, the backdrop of political and regulatory intervention has not changed. It has become commonplace to see an annual stab at the industry, be it through threats on taxation or bans on certain types of products. A world increasingly focused on the health and wellbeing of individuals is also not a supportive backdrop for an industry that sells addictive products.
“Those threats haven’t been enough to stop a ‘vulture’ type investor from taking positions in both of the London-listed tobacco stocks. Kenneth Dart’s Spring Mountain Investments has quietly built up a 6.59% stake in British American Tobacco, making it the largest individual shareholder according to data from Refinitiv. Spring Mountain has also taken a 2.79% stake in Imperial Brands, making it the eighth largest investor in the business.
“It remains to be seen what Spring Mountain’s intentions are, but stakes of that size could give it the ability to start making demands for strategic change.”