Fears over the regulation of cigarette packets and evidence that economic problems in developed markets can hit the most profitable premium brands have been weighing on the tobacco sector. When we last analysed the sector's prospects almost nine months ago, we expressed our concerns that PE valuations had moved ahead of the industry's long-term average and that investors seemed to have started to avoid the sector despite market turbulence, which usually prefigures a rise in defensive shares such as those in tobacco companies (see Sector Focus: Has tobacco run out of puff? 6 Jun 2012.) Nine months on and the UK sector has produced a total return of 8.7 per cent, which is substantially below the 21.1 per cent from the FTSE 350. But things have changed and a look at the tobacco industry from a global perspective reveals that attractive income is still there to be had at a reasonable price with the added bonus of a possible recovery in earnings as the year progresses. If this happens, driven in part by easier comparisons with last year, then there could be decent returns on offer in 2013 particularly for investors prepared to take an international perspective.
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