Tobacco Makers Fume at New Laws but Shares Light up

Source from:  The Australian 03/25/2015

A wave of "plain packaging" regulation threatening to sweep Europe is causing alarm at global tobacco companies, but investors in those companies seem far from worried.

Despite Britain and Ireland this month passing laws to ban branding on cigarette packages - and France already discussing similar proposals - tobacco companies have generally outperformed other consumer-goods makers since the start of the year.

Shares in Japan Tobacco and Imperial Tobacco Group, which together control 85 per cent of the $US25 billion ($32bn) British cigarette market and would be most affected by plain packaging, are both up about 10 per cent in the past three months.

Investors argue that decades of anti-tobacco measures in developed countries have barely harmed the investment case for cigarette companies, so why should this one? "Each new regulation takes costs out of the business," said a top-10 shareholder in Philip Morris International, the world's biggest tobacco firm excluding China.

As with other major tobacco legislation - from advertising restrictions to bans on smoking in public - authorities hope plain packaging will reduce smoking rates. That means sales volumes at tobacco companies are likely to fall, as they have for many years across the industry.

But with volumes in long-term decline, tobacco companies invest less in production facilities and new machinery. Restrictions on advertising also contribute to millions of dollars in savings every year.

That frees up cash, which is largely returned to investors. Europe's three major listed tobacco companies have averaged dividend yields of just over 4 per cent in the past three years, compared with 2.7 per cent on the pan-European Stoxx Europe 600 index, according to FactSet.

Some tobacco investors say plain packaging - which requires big, graphic health warnings on packs - could even benefit the companies because it will lock in market share.

"Regulation has made it almost impossible to build a new brand," said Simon Raubenheimer, a portfolio manager at Allan Gray, a top British American Tobacco PLC shareholder.

"The barriers to entry are massive," he added. "That's probably the biggest positive."

The indifference of shareholders contrasts sharply with executives at the companies they invest in. "The ambition should be some sense," said Nicandro Durante, British American Tobacco's chief executive, when asked last month what he hoped to achieve by suing the British government over plain-packaging laws.

Other large tobacco companies are also planning legal action in Britain and Ireland. Tobacco companies are trying to block plain-packaging measures before they take effect next year. The manufacturers contend the laws would violate EU trademark laws as well as international trade rules set out by the World Trade Organisation. Enditem