British American Tobacco shares (BAT) may look cheap given its dividends, but the health and legal risks around tobacco products and the shift in consumer preferences towards a healthier and more socially conscious lifestyle indicate the price may be low for good reason.
This was according to Old Mutual Al Baraka Balance Fund fund manager Saliegh Salaam, who said in an interview that the increasing loss of social support, or “social licence to operate”, for tobacco companies, even though they provide products consumed by millions of people, meant it was better to avoid these companies as investments.
“This is one instance where Mr Market has got it right,” he said, adding the risks for BAT were not transient, but raised questions about its long-term sustainability.
BAT, which operates in about 180 countries, had a price:earnings (p:e) ratio of only 9.5 on the JSE yesterday at a share price of R568.79, a low valuation considering the average p:e ratio of the FTSE/JSE All Share Index was 13, while the S&P 500 Index average was 22.22.
Market.com said on Sunday Credit Suisse Group had reiterated an “outperform” rating on BAT shares in a research note last Wednesday, while ValuEngine had lowered BAT from a “sell” to a “strong sell” rating in a research report on May 27.
The tobacco industry has been in the spotlight in recent weeks after smoking was banned in South Africa during the lockdown, pro-tobacco interests constantly reminded the public how much the fiscus was losing in taxes on tobacco product sales.
In fact, said Salaam, last week the University of Cape Town reported that for every cigarette a person smokes at a retail price of about R2.25, the government loses about R3.40 due to health implications and loss of productivity.
Salaam said a risk factor for investors in a share such as BAT was that sectors with a low social licence tended to attract more significant taxes and struggle with access to markets.
“Governments across the world are likely to continue taking a more active stance against companies seen to be causing social harm in light of Covid-19, and that includes tobacco and alcohol,” said Salaam.
Tobacco shares have long been excluded by ethical and sustainable investment funds, he said.
“Tobacco is seen as a sunset industry – one that is old and declining – and is becoming too risky, as various stakeholders take a stand against the industry,” he said.
He said there was a constant backdrop of legal risk regarding the health and safety aspects of tobacco, while the health aspects of new tobacco products, such as vaping and e-cigarettes, were untested, or still under investigation in various parts of the world.
Other risks were the ethical, social and governance sustainability of some of BAT’s suppliers, while there were ongoing concerns about tax receipts and practices, and sanctions busting and even bribery in some of the countries where BAT operated, although BAT professes to operate according to the letter of the law in the countries where it sells its products.