US
It is a dark irony that a respiratory pandemic could pull tobacco stocks out of their three-year funk.
British American Tobacco stuck to its 2020 outlook in a capital markets day even as many other global companies slashed theirs. The maker of Lucky Strike cigarettes has been largely untouched by the Covid-19 outbreak so far, other than a hit to travel-retail sales in airports that contribute less than 1% of group revenue.
Early signs are that demand for tobacco is stable. In the US, the number of cigarettes sold in the four weeks through February 22 fell 3.5%, according to data from MSAi, an improvement on the steeper declines seen throughout 2019. A crackdown on e-cigarettes is shifting smokers back to traditional cigarettes, and the latest data predates the rapid escalation in Covid-19 cases in the US. But. BAT has also seen no slowdown in purchases in Italy or France, where specialist tobacconists are among the only stores that remain open, alongside supermarkets and pharmacies.
If that trend holds, tobacco’s temptations will grow for investors. Valuations are extremely low: Altria and BAT shares are trading close to earnings multiples last seen in the early 2000s, when investors worried the tobacco industry would be bankrupted by litigation; Imperial Brands is now below its trough multiple back then. Average dividend yields are 10%, and high cash generation suggests that payouts are safe, except at Imperial where a new chief executive is taking over.