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Kicking the habit: why more income managers are falling out of love with tobacco giants
by James Phillipps on Feb 06, 2013 at 08:16
Although he is confident about their pricing power and remains overweight the sector, he has reduced this position from 7.2% last year to 6.6% this year versus a 4.9% index weighting and he expects to reduce his exposure further. ‘We have reduced this because we are concerned that cigarette pricing is already very high in many markets, that the social and legal trends against the industry are increasingly negative and that the valuations are not as attractive as they once were,’ he says.
Moore believes these valuations could come under further pressure, however with BAT’s dividend growth in particular in a downward spiral. He points out that after upping its shareholder payout by 19% in 2009, this fell to 14% in 2010 and 10% in 2011. ‘It is gradually shifting from being a dividend growth stock to a stodgy flat dividend stock,’ he adds.
That said, there many still plenty of investors that continue to back the sector as a cash generative source of well-funded dividends. Invesco Perpetual’s Neil Woodford is the most high profile tobacco champion through his Income and High Income funds, while BlackRock UK Income co-manager Nick McLeod-Clarke says that he has been topping up his weighting in BAT on price weakness.
However, Ewen Cameron Watt, chief investment strategist at the BlackRock Investment Institute, another long-term tobacco holder, admits he sees his call to sell out of the sector as one of his biggest pain trades of 2013.
‘Our biggest contrarian ideas [include] selling “safe” tobacco stocks, buying US companies with cash piles abroad and European and US financials,’ he says.
Whenever the long-term tobacco lovers are starting to move on, the potential opportunity cost of standing firm should surely be reassessed.
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