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High nicotine levels and menthol cigarette flavourings may soon join the list of things that Joe Biden’s administration hopes to ban. Tobacco stocks reacted characteristically to reports of plans to reduce nicotine in their products to non-addictive levels. British American Tobacco and Imperial Brands lost 7-8 per cent each when the London market opened on Tuesday. Altria fell by a similar amount in the US, while Philip Morris shares rose.
Traditional cigarette volumes are already on a multi-decade decline as social and health concerns discourage smoking. Current straight-line trajectories for smoking prevalence and cigarette sales suggest both will hit zero in the US between 2040 and 2045.
Many other markets will hit that point by 2050 at the latest. So much for Big Tobacco’s claims that the developing world would stay loyal to its life-eroding product. Worldwide volumes have been declining since 2012.
A ban on menthol flavourings was first mooted in the US in 2013 and would bring the country in line with the EU, UK and Canada. Menthol gaspers account for about 35 per cent of US cigarette volumes and are seen as appealing dangerously to the young. Smoking among 18 to 24-year-olds has been falling far faster than other age groups. It more than halved in the five years to 2019 to just 8 per cent.
In the past, tobacco companies simply increased prices to make up for lower volumes. The future of Big Tobacco depends on the success of vaping and other lower-harm smoking products.
Philip Morris’s success with heated tobacco, 24 per cent of sales at the latest count, has been rewarded with a 15 times forward earnings multiple. Its shares rose slightly. BAT’s 9 times multiple reflects a single-digit percentage of sales from new products.
The corollary is a dividend yield of 8 per cent covered half again by BAT’s expected free cash flows this year. Tobacco stocks remain a defensive play in the short term. In the longer term they are a proposition only for investors skilled in valuing businesses with dwindling cashflows. Nicotine may eventually be regulated and campaigned out of existence, just like cigarettes.
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