August 20, 2019
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Investors suffer a smoking relapse

New York (USA), Apr 16 (efe-epa).- Much like die-hard smokers, investors are finding it hard to stay away from cigarettes, according to a Dow Jones Newswires report made available to EFE on Tuesday.

The lure of tobacco stocks is an income fix, but none of the big risks have really gone away.

The S&P 500 tobacco index has gained more than a fifth since the beginning of the year, outperforming the wider United States benchmark.

After a terrible 2018, shareholders in Altria, which sells Marlboro in the US, and Philip Morris International, which sells the same brand elsewhere, have been soothed by recent developments.

One was the resignation of the head of the Food and Drug Administration, Scott Gottlieb. His aggressive approach to tobacco regulation, pushing for a ban on menthol cigarettes and measures to curb e-cigarette use among US high-school students, spooked the industry in 2018. Executives and investors are hoping his departure will mean a less hawkish FDA.

But even as the prospect hhof a US menthol ban fades into the background, the risk of a crackdown on vaping is actually growing.

The FDA just launched an investigation into a possible link between e-cigarettes and seizures, while San Francisco wants to ban e-cigarettes altogether until health impacts are properly understood. Internationally, regulators in Hong Kong and India are reluctant to approve vaping products that are attracting young users.

That is particularly ominous for Altria, which took a $13 billion minority stake in San Francisco-based JUUL Labs late last year, but London-listed British American Tobacco has also invested big sums in e-cigarettes.

Anything that slows their growth makes it harder for tobacco companies to offset the long-term decline of their traditional product.

Investors may also have grown more bullish following guidance from tobacco giants that vaping won't cannibalize traditional cigarettes as much as feared.

Altria believes cigarette volumes will decline at an annual rate of 4-5 percent over the next five years - in line with trends since 2007. But not everyone agrees with the rosy outlook: Analysts at Cowen estimate that by 2025, cigarette volume could drop by double what the Marlboro maker has projected.

The perennial appeal of big tobacco is its cash generation, which funds big dividends. Following last year's selloff, yields stand at roughly 6 percent.

But companies will struggle to increase the payout at the rate they used to as they invest heavily in alternatives to traditional smoking, including heat-not-burn tobacco products as well as e-cigarettes.

The cigarette business has weathered difficult times before, but its future now looks particularly uncertain. Investors should look for ways to wean themselves off those big dividends.

By Carol Ryan

dj/

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