Almost every smoker needs a regular fix and is thus a guaranteed source of repeat business. When times are hard people will keep on smoking, some even at cutting back on food, although many will switch to cheaper brands made by the same tobacco companies.
This means that tobacco company profits are extremely resistant to economic downturns and they also do pretty well during the good times.
Proper job from the West Country
The Bristol-based tobacco multinational Imperial Tobacco (LSE: IMT.L – news) released its half-yearly results on Tuesday. These reflected the strength of the tobacco business with headline basic earnings per share rising by 34% whilst the interim dividend was increased by 16%.
Forecasts for the full year put Imperial (Berlin: IOD.BE – news) ‘s shares on a price-earnings ratio of about 10.5, below the market average, whilst they yield just over 4.8%. About the only major concern is that consumers in the developed world are switching to cheaper brands and rolling more of their own fags.
The market didn’t seem too bothered about this and marked Imperial’s shares up by over 3% in early trading.
Ethics v Profits
Many investors won’t invest in tobacco companies on ethical grounds because they sell products which are known to harm their users. But ethics, by their nature, can be highly subjective and if investors study their own ideological viewpoints they will often discover some contradictions.
For example, I’m averse to investing in tobacco companies although my stance has weakened in the last year or two since tobacco is, after all, a perfectly legal product. But I’m more than happy to invest in arms manufacturers, which aren’t exactly what you could call people-friendly products!
If you’ve got no qualms about investing in tobacco then companies like Imperial Tobacco offer you a high yield and reasonable growth prospects.
Tobacco may be inferior, but…
Tobacco displays some of the characteristics of what economists call an inferior good. This means that when consumers’ incomes reach a certain level, any further increase in their income will cause their consumption of the inferior good to decrease.
So its consumers aren’t necessarily thinking rationally about reducing their tobacco consumption whenever their income increases.
Furthermore, over the last four decades the level of smoking in the developed world has been declining because people have become much more aware of the health risks and governments have also heavily taxed cigarettes to try and deter consumption.
But there are some good growth prospects in the developing world and imported cigarettes have traditionally been strong sellers when matched against the poorer quality domestic brands in many countries.
The legal debate over smoking has pretty much been resolved. Given the amount of adverse publicity that smoking has had during the past forty years, anyone who smokes and doesn’t realise that tobacco is harmful to their health must have been living on another planet! They’ll find that nowadays it is extremely difficult to succeed with a claim for damages.
- Davidoff Portfolio Management
- Imperial Tobacco predicts no repeat of ‘perfect storm’ Spanish price wars as profits edge higher
- Imperial challenging bigger Canadian warnings