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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.
Tobacco stocks have been stalwart holdings for income funds over the past two years, but the sector is becoming increasingly divisive, with a number of managers now selling down or even ditching their holdings.
The sector has certainly had a strong run, delivering a total return of more than 650% over the past decade. It has also proved resilient during the recent market turbulence, with investors attracted to its defensive characteristics of strong cashflow and solid dividends.
A look at the numbers
Year to date the returns have been less impressive, but still better than the market, with British American down 1.46% and Imperial Tobacco off 3.36% compared with the FTSE’s 5.42% fall. All that damage was done in the May sell-off, but at a corporate level the stocks are continuing to deliver.
In its half-yearly update last month, Imperial Tobacco reported net revenue up 3.3%, and operating profits also up 3.3% over the six months to the end of March, leading it to increase its interim dividend by 12.8%. British American saw 4% revenue growth over the three months to the end of March.
The only dark cloud in the short term appears to be the fact that sterling weakness is eroding profits slightly.
But a number of leading income managers started selling down their holdings and taking profits through the first four months of the year.
‘It has had a flawless decade of rerating and is now regarded as immortal,’ he says. ‘Few are bearish and threats are seen as impotent. No need to panic, but profit-taking seems sensible.’
Similarly, Citywire A-rated Threadneedle UK Equity Income fund manager Leigh Harrison has taken a similar stance, reducing his stake in British American from 5.5% to 3.4% of the fund in the past few weeks, rotating some of the proceeds into higher-yielding AstraZeneca (AZN.L) and GlaxoSmithKline (GSK.L).
‘We have taken a lot of money out of British American,’ he says. ‘At £32.50, we felt that it had been on a phenomenal run and the yield was down to 4.5%. We think there are other stocks in the market with more attractive yields. It is still a reasonable position and it is now roughly in line with the weighting of other income funds.’
Even Invesco Perpetual Income and High Income manager Neil Woodford, one of the biggest champions of the sector, has been top-slicing his tobacco holdings, although they do remain substantial, with British American and Reynolds American 11.4% of the fund combined.
More about this:
Look up the funds
- Artemis Income I Inc
- Threadneedle UK Equity Income C1
- Invesco Perpetual Income Inc
- CF Walker Crips Equity Income Acc
- JOHCM UK Equity Income GBP Acc Inst
- Schroder Income A Acc
Look up the shares
- British American Tobacco PLC (BATS.L)
- Imperial Tobacco Group PLC (IMT.L)
- AstraZeneca PLC (AZN.L)
- GlaxoSmithKline PLC (GSK.L)
Look up the investment trusts
Look up the fund managers
- Adrian Frost
- Leigh Harrison
- Neil Woodford
- Mark Barnett
- Jan Luthman
- Stephen Bailey
- Clive Beagles
- Kevin Murphy
- Nick Kirrage
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