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Smoke and mirrors

In companies such as tobacco groups that generate large amounts of surplus cash, how should this cash be best employed? The choice boils down to:

Investment in current businesses. Tobacco companies like British American Tobacco (BATS) have already invested heavily in vaping, e-cigarette and “modern oral” nicotine brands. Despite a health scare about vaping in the US in 2018, and a ban being threatened on flavoured e-cigarettes, BAT now has 16m consumers of non-combustible products, and aims to triple this number by 2030. BAT’s aim of reducing “the health impact of its business by offering a greater choice of enjoyable and less risky products” is an appeal pitched towards impact, rather than ESG, investors.

Acquisition of another business. This can be risky. During 2018, whilst BAT was still absorbing Reynolds America, which increased the group’s US exposure to 40 per cent, its share price halved under the threat of a ban on menthol cigarettes, which form about a quarter of the group’s sales. And investors are backing the takeover of Vectura by Philip Morris despite reservations about the wisdom of an inhaler company that aims to improve health being owned by a company that sells health-threatening products.

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