Tobacco sector performs four times better than the market since the smoking ban

Saturday 1 July marked the tenth anniversary of the smoking ban in public places in England. With the ban already in force in Scotland, Wales and Northern Ireland, the ban in England was seen by many as the final straw for the tobacco industry.

Good for your health but not your investments?

While the ban has undoubtedly been good for public health, with more people stubbing-out the habit, investors who quit the sector haven’t been rewarded.

The FTSE All Share Tobacco sector has returned 300.56%¹ since 1 July 2007, while the wider market, the FTSE All Share, has returned 70.99%¹. And it’s not just a UK phenomenon. THE MSCI ACWI/Tobacco sector returned 433.99%¹ compared with 133.36%¹ for the MSCI World.

Juliet Schooling Latter, research director of FundCalibre, commented: “10 years ago, everything seemed to be going against the sector, with many stocks being priced to zero. Smoking in the developed world is still declining and restrictions are increasing in emerging markets too.

“However, the big threat of litigation has mostly passed and cigarette companies have managed to grow profits – the one thing they do have is pricing power. They’ve also cut costs and no hefty advertising budgets, due to the bans and the result is that their cash flow is passed back to shareholders via dividends and buybacks – income that is hard to come by in other sectors right now.”

Three funds that invest in tobacco

Back in 2007, while acknowledging the decline in tobacco consumption, Neil Woodford was quoted as saying that “this trend has led tobacco businesses to focus on margin rather than volume, protecting earnings’ growth through a mix of pricing and efficiency gains in manufacturing and distribution.” He continued to rate them highly as investment opportunities.

CF Woodford Equity Income currently has both BAT and Imperial Brands in the top ten holdings accounting for 12%² of the portfolio.

Fidelity Enhanced Income and M&G Global Dividend also hold two tobacco stocks in their top 10 holdings accounting for 8.3%² and 9.9%² of the respective portfolios.

Three funds that don’t

In May last year, AXA announced it would cease to invest in tobacco due to what it felt was a conflict of interest being an insurance business against the sector for health reasons, as well as a fund management company. As a consequence, AXA Framlington UK Select Opportunities no longer invests in the sector.

Other funds have screened out tobacco companies for many years on ethical grounds. EdenTree Amity UK is an example. It screens out any company where production of tobacco contributes to 10% or more of pre-tax profits or turnover. Standard Life Investments UK Ethical is another example and this fund eliminates the whole sector from its investment universe. All three funds have comfortably beaten the FTSE All Share in the past 10 years¹.

¹Source: FE Analytics, 1 July 2007 to 26 June 2017, total returns in sterling
²Source: FE Analytics, May 2017