Tobacco giants snuffed out by Joe Biden threat

Labelled as one of the ‘sin stocks’, the new US president has it in for the high-yielding tobacco sector.

The tobacco sector's vulnerability to regulation sent shares in Imperial Brands (LSE:IMB) and British American Tobacco (LSE:BATS) sharply lower today amid reports of potential new curbs in the US.

According to the Wall Street Journal, President Joe Biden is considering a move to reduce the amount of nicotine in cigarettes to levels no longer considered addictive.

The health watchdog, the US Food & Drug Administration, is also said to be mulling whether the measures should be accompanied by a ban on menthol cigarettes. The US represents 40% of the global industry's value.

• ‘Restore the Earth’ fund options for Earth Day 2021
• ii investment review: Q1 2021

Investors were spooked by the report, with Marlboro owner Altria (NYSE:MO) down 6% on Wall Street and London-listed rivals Imperial and BAT both lower by similar levels as they unwound a chunk of the gains of more than 15% seen over the past six weeks.

Their recent recovery had reflected tobacco volumes remaining in line with expectations, despite the impact of the pandemic on consumer buying patterns and airport purchases. 

This trend was highlighted on 30 March when Davidoff and Embassy owner Imperial reiterated forecasts for 2021 profits, aided by strong pricing in tobacco and growth in revenues from next generation products.

These potentially less harmful products span vapour, heated tobacco and oral nicotine, with management targeting sales equivalent to 20% of the total nicotine market by 2025.

• ii view: dividend stock Imperial Brands flags lower vaping losses
• Discover how to be a better investor here
• Check out our award-winning stocks and shares ISA

Today's report serves to highlight the need to quicken the pace of the roll out of these newer products, particularly with increasing numbers of investors choosing to eschew the tobacco sector as an investment given the growing popularity of ethical considerations.

Even these products are under regulatory scrutiny, however, with the use of flavourings to enhance consumer enjoyment an ongoing area of concern for the US FDA.

BAT's February annual results showed that it had increased the number of consumers of non-combustible products by three million to 13.5 million last year, with investment in new categories up by a further £426 million in the period.

• Want to invest ethically? ii’s ACE 40 list of ethical investments can help
• 10 shares to give you a £10,000 annual income in 2021
• British American Tobacco still a ‘buy’, but for how long?

CEO Jack Bowles has spoken about reducing the “harm footprint” of the business and doing more to encourage the switch to reduced risk products. Vapour, heated tobacco and other alternatives still only accounted for 12% of group revenues in 2020, however, with frontline brands including Dunhill, Kent and Lucky Strike driving £9.8 billion of net cash for the year.

This prodigious level of cash generation continues to make the sector attractive for income investors, based on yields of more than 7%. BAT pledged in February to stick by its 65% dividend pay-out ratio as it increased its full-year pay-out by 2.5% to 215.6p a share, despite the uncertainty caused by the pandemic.