Sin stocks are supposed to outperform the market over time. Four years ago, London Business School professors discovered that tobacco had outshone all other sectors since 1919. But the old certainties have been stubbed out. Deathstick makers’ share prices have dived over the past three years. That of UK-headquartered Imperial Brands has almost halved. Its shareholders’ loyalty is being stretched to breaking point, the FT reported on Monday.
The stock has been hammered by the threat of tougher regulation, slow innovation and a stretched balance sheet. The shares are priced at 7.3 times next year’s earnings, less than half the sector mean. The dividend yield is a full-strength 9 per cent.
The company is doing at least some of the right things. It will shortly sell its cigar business as part of plans to rake in £2bn from disposals by May 2020. That should allow it to reduce borrowings and undertake earnings-boosting share buybacks. It has dropped its 10 per cent dividend growth target in favour of a more flexible approach.
Convincing investors it has the skills to carve out a future in tobacco alternatives such as e-cigarettes will be harder. It dropped “Tobacco” from its name in 2016 but has lagged some peers in betting on cigarette alternatives. Sales of such products fell short of City of London expectations in the six months to March.
If Imperial is to adapt successfully, much depends on the speed at which smokers kick the habit. For now, there are signs smokers are not switching as fast as many expected. Many both vape and smoke. Yet regulators could speed up the move away from tobacco. The Food and Drug Administration is considering reducing the nicotine in US cigarettes to non-addictive levels. If adopted, such a move could hit stocks such as Imperial hard.
The addictive property of nicotine is a big reason why tobacco has been so attractive to investors. Without it, investing in these sin stocks would become even less rewarding.
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