The stage is set in 2016 for a major stand-off between four goliaths of the global tobacco industry and the UK government.
The two London-listed groups, Imperial Tobacco (IMT) and British American Tobacco (BATS), have joined forces with Philip Morris International (US:PM) and Japan Tobacco International in a bid to halt the implementation of a ban on branded cigarette packaging due to begin this year.
MPs voted for the ban in March 2015 on the view that it would help reduce the number of children taking up smoking. Under the rules, companies have until May 2017 to replace packs with dark brown or green boxes that are entirely plain except for health warnings and a brand name in a standardised type face.
The companies will claim in their High Court hearing that the ban infringes property rights and will be ineffective in reducing levels of smoking.
A spokesperson for BAT said the government made a "serious error of judgment" by not properly considering data from Australia - where plain packaging has been implemented - showing the move is not achieving its public health objectives.
Elsewhere in 2015, Imperial secured its place as a major US competitor after it finalised its deal to buy a range of cigarette brands from Lorillard (US:LO) and Reynolds American (US:RAI) as part of the latter's purchase of the former. But BAT, which had a 42 per cent holding in Reynolds, injected $4.7bn (£3.2bn) into the merged US group to maintain its stake.
On the plus side for all tobacco stocks, Public Health England proclaimed e-cigarettes are 95 per cent less harmful than their tobacco-based cousins. This is important given an increasingly significant driver of tobacco businesses going forward - probably more so in western economies rather than developing ones it could be argued - is likely to be the e-cigarette and any future developments of this. Its importance could be amplified further if politicians have their way in that courtroom showdown and consign powerful brand packaging to the history books.
| Price (p) | Market cap (£m) | PE (x) | DY (%) | 1-year change (%) | Last IC view: | |
|---|---|---|---|---|---|---|
| BRITISH AMERICAN TOBACCO | 3,647 | 67,988 | 18.6 | 4.1 | 1.4 | Hold, 3,652p, 30 July 2015 |
| IMPERIAL TOBACCO GP. | 3,560 | 34,125 | 16.8 | 4.0 | 20.9 | Buy, 3,477p, 03 November 2015 |
Favourites
Our favoured play of the two London-based stocks is Imperial Tobacco. This also chimes with sentiment in the fund management industry where 152 UK-domiciled active retail funds and investment trusts - according to Morningstar data - have what could be considered an active weighting (a holding above the size of the stock's weighting in the FTSE of 2.11 per cent). The yields of the two FTSE giants are virtually identical as is net debt in percentage terms. The fact cash generation at IMT will be supported by the company's cost-cutting plan, which had yielded £85m by November out of a planned £300m due by September 2018, tips the balance for us though.
Outsiders
BAT is a solid income stock but a smaller amount of actively managed UK-domiciled funds and trusts - 43 according to data from Morningstar - have an active position in the company (above 4.37 per cent). The company is expanding thanks to its plans to acquire central Europe-focused TDR from Adris Grupa for €550m (£409m), and is eyeing up the remainder of Brazilian subsidiary Souza Cruz. Its e-cigarettes business is performing as management hoped.
