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Tobacco stocks: time to kick the habit?

Tobacco shares have performed strongly over the past couple of years, but many now believe they're overvalued. We look at where some top managers stand on the issue.

 

His colleague Mark Barnett, manager of the Perpetual Income & Growth trust, believes there is still value in the sector despite its strong run.

‘My portfolios are still as exposed as they have been to tobacco, although it is no longer the largest sector – pharmaceuticals is actually slightly larger now,’ he says. ‘I still think there is value in tobacco. The point about certainty of earnings is, I think, a very good one for tobacco companies.’

Similarly, Jan Luthman is maintaining an overweight to the sector in the CF Walker Crips Equity Income fund he co-manages with Stephen Bailey. Both Imperial Tobacco and British American are top 10 holdings.

‘Like pharma, tobacco has very secure income streams and good pricing power,’ Luthman says. ‘In emerging markets there is also the potential to push consumers upmarket to more premium brands as spending power grows.

‘There is regulatory risk in the Far East as governments wake up to the damage smoking does, but it is such a popular pastime and is a huge revenue earner.’

Managers shunning the sector

But there are a few managers who are shunning tobacco altogether. JOHCM UK Equity Income manager Clive Beagles has had a long-term zero allocation to the sector, warning that many classic defensive stocks are ‘monstrously overvalued’.

This has led him to steer clear of many of the ‘highly consensual narrow band’ of tobacco and pharmaceutical stocks favoured by a lot of his rivals.

Schroder Income managers Kevin Murphy and Nick Kirrage are also continuing to shun the sector, citing stretched valuations. The pair favour pharmaceuticals, which have also had a strong run and could yet be the next divisive sector among equity income managers.

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4 comments so far. Why not have your say?

Fully informed

Jun 13, 2012 at 12:54

Disgusting to make money out of this noxious product.

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Jeremy Bosk

Jun 13, 2012 at 13:17

On the plus side it is keeping down the population of cretins and sadomasochists. Perhaps they should be made MORE poisonous?

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Fully informed

Jun 13, 2012 at 13:21

True, would remove a strain of bad decision making at a stroke. Fair enough.

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Rob Walker

Jun 13, 2012 at 13:37

A 4% return on a global company relatively unaffected by crop failure, political unrest, technology changes and Euro crises looks good to me.

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