Cigarettes are very definitely bad for you, as the latest government report into the effects of smoking points out in exhaustively gruesome detail. However, shareholders have benefited from the tobacco industry's ability to cut costs while raising prices and have seen their investments almost quadruple in value since tobacco shares plunged out of favour during the dotcom boom. After such a long bull run, the question turns inevitably to whether it would be wise to cash in on tobacco shares, which are trading at a slightly higher PE ratio than their long-term average, and find another undervalued sector that can provide income.
There has been a lot of comment on how flat the share prices of tobacco companies have been since the start of the year (see chart below). Admittedly, markets have been volatile, but that would usually presage a spike in the price of tobacco shares as investors look for a safe haven. That hasn't happened this time and many sector watchers are starting to ask why.