Back in August, it was widely reported that the Centers for Disease Control and Prevention (CDC) was in consultation with state health departments in the US about a cluster of respiratory/pulmonary illnesses associated with vaping or e-cigarette use.
By the end of the year, the CDC had been notified that a total of 2,561 people had been hospitalised with lung complaints linked to vaping, 55 of whom had succumbed to their illnesses.
The epidemic of lung complaints peaked in September, although new cases are still being reported. The CDC also revealed that more people are being readmitted to hospitals after being discharged. US health officials are trying to evaluate why readmissions are on the rise, but the government agency has identified vitamin E acetate in THC vaping products as the possible cause behind the illnesses (THC is the active compound in marijuana). The viscosity of vitamin E acetate, when heated, has the potential to cause problems, effectively clogging bronchi, although the CDC evaluation of other possible causes continues.
The December update from the CDC represented a positive beat for the likes of Imperial Brands (IMB) and British American Tobacco (BATS), as it seems probable that the culprit behind the outbreak was an additive used in marijuana vaping but never used in nicotine vaping. The CDC still recommends that the only way to ensure safety is to refrain from the use of all vaping products, but it looks as though the agency may genuinely have erred on the side of caution.
Imperial derived 70 per cent of its September year-end sales growth through its next-generation products, while BATS is targeting £5bn of revenues from new categories by 2023, so prospects for the tobacco giants will improve significantly if it transpires that the initial notification by the CDC is judged to have been alarmist.
Regardless of the CDC stance, it is nailed on that we will witness a roll-out of new regulation in relation to vaping products once the implications for public health are better understood.
Another risk factor centres on increased efforts by public officials to curb the use of tobacco products in emerging market economies, most notably India. Industry figures and analysts alike may have blithely assumed that rising discretionary incomes in emerging markets would automatically translate into increased tobacco consumption, although this is belied by the experience of western markets.
Tobacco companies throw off cash, so they have traditionally been targeted by income seekers, but the industry is arguably in structural decline. The yields now on offer reflect deteriorating market sentiment, and in the case of Imperial Brands, anxieties over debt servicing. The end-year update from the CDC provided temporary respite, but the regulatory assault on the industry is broadening across the globe.
| NAME | Price (p) | Market cap (£m) | 12-month (%) | Fwd PE | Yield (%) | Last IC View |
| British American Tobacco | 3,388 | 77,669 | 36.80% | 10 | 5.90% | Hold, 2,983p, 22 Nov 2019 |
| Imperial Brands | 1,953 | 18,315 | -21.30% | 7 | 10.60% | Sell, 1,759p, 6 Nov 2019 |
