BATS is looking to drive consumption in emerging markets, while extolling the virtues of vaping and other “potentially reduced-risk products”, such as moist snuff and snus, the latter a smokeless, moist powder tobacco pouch that you place under your top lip. Latter-day chewing tobacco by the sound of it; a return to the spittoon, perhaps? Group chief executive, Jack Bowles, reassured that the “primary focus remains the health and well-being of our employees”. Presumably, the rest of us can make our own arrangements.
The bad news is that cigarette volumes in emerging market economies have fallen away appreciably, although not primarily due to any increased caution from consumers in the face of a potentially lethal respiratory ailment. In addition to the lockdown measures, some governments have implemented outright sales bans. BATS cited the case in South Africa, where officials amended regulations to prohibit the sales of tobacco and nicotine products, which are designated as non-essential goods. Some might take issue with that classification, but government officials were compelled to act due to the high prevalence of diabetes, tuberculosis, and HIV in the country.
The upshot is that the group expects global cigarette consumption to fall by 7 per cent due to the virus. Accordingly, it is guiding for a FY2020 revenue increase of 1-3 per cent, down from the previously stated 3-5 per cent range, while the group now expects mid-single figure adjusted earnings growth. Happily, BATS has confirmed that its dividend policy remains intact.
Midway through April we tried to assess how sin stocks were faring as the virus took hold. Two months later, and we still find ourselves under lockdown, or at least those of us not given to riotous assembly.
Central bank slush funds continue to prop-up indices, thereby delaying the eventual reckoning. So, a comparison of the return of sin stocks relative to a given benchmark might not be as illuminating as it would be under normal circumstances. That may sound like a cop out, but we are living through interesting times (why does that expression resonate?).
At any rate, extolling the virtues of palpably unvirtuous stocks is out of step with the prevailing narrative that socially responsible investing is the only game in town. We are steadily moving towards a future in which everything that is not proscribed will be made compulsory.
Some have expressed the view that the Covid-19 phenomenon may eventually come to be viewed as a watershed for sustainable investment strategies – whatever that means. Morningstar data indicate that funds operating under environmental, social and governance (ESG) mandates attracted record inflows even as the virus took hold, possibly a reaction to the explicit public commitment to ESG strategies by Larry Fink, chief executive of BlackRock (US:BLK).
Mr Fink’s imprimatur would not have hurt the investment case, nor would have recent studies pointing to a possible link between sound ESG policies and reduced financial risk. The trouble is that we are relying on a relatively short-run data set, combined with inconsistent application of standards.
The issue of climate change provides a case in point. Oil producers have supplanted tobacco companies on the whipping post, but who separates the sinful from the righteous? There have been well-publicised campaigns to strip oil companies of institutional support, yet Norway’s Equinor ASA (Nor:EQNR) has gained a AAA rating from MSCI. Maybe the name change did it, but application in this area is likely to remain highly subjective.
The UK is well served with sin stocks. Apart from BATS and Imperial Brands (IMB), we have two oil majors, the biggest global distiller, the world’s fourth-largest arms manufacturer, although no pornographers to speak of. These companies may lose a degree of institutional support through ESG strategies, although they will still benefit from index-linked mandates. Investors need only take account of the long-run outperformance of tobacco and alcohol stocks and the compensation often provided by a heightened risk premium.
