Merryn's Blog

Holding tobacco stocks for income? Neil Woodford is too – but maybe you should both sell

Tobacco stocks have long provided some of the best and most regular dividend payments around. But, says Merryn Somerset Webb, that may not last much longer.

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Governments in developed countries have been waging an all-out war against smoking for decades now, after being hit by the huge cost of healthcare in their ageing societies.

And the war is working: the number of smokers has dramatically declined 50% of British men smoked in the 1970s; 20% do now. And I suspect it will keep working.

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Late last year, France launched a new crackdown on smoking in a bid to entirely eradicate it in four decades (it is now against the rules to smoke in a car with children in it, for example).

The tobacco bulls shrug this kind of thing off: new growth will come from the emerging economies, they say, and the stream of dividends will keep coming as a result. I am not so sure.

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I have noted before that there is no reason for the authorities in emerging economies to be quite so slow on the regulatory uptake as we have been. They've seen what smoking related diseases have done to the cost of our health services. Why would they allow the same thing to happen to theirs?

An article today in the Times makes the point. Smoking on all public transport and in public places is now forbidden in Beijing, and there are no longer to be indoor smoking rooms at Beijing airport. Lighting up near schools, hospitals and youth clubs is also against the rules.

In the past, similar rules have been badly policed. No more: anyone caught can now get a £21 fine and a public shaming on a government website, while employers who allow employees to smoke face a £1,000 fine.

This isn't going to stop China's 300 million smokers overnight, but it tells you what the Chinese authorities want; and we know they mostly get what they want. You can read more on this in today's Money Morning, but it's also worth noting a development that's sent tobacco stocks plunging today.

Yesterday, Canadian authorities ordered British American Tobacco's Canadian subsidiary to pay smokers CDN$10.4bn (around £5.5 billion) in damages. That, as the analysts at Hargreaves Lansdown point out, would wipe out around a year's profits for the tobacco firm. Ouch.

BAT is to appeal, and presumably appeal again if necessary as are the other two firms hit with damages (Japan Tobacco and Philip Morris). But they won't necessarily win and appealing doesn't come cheap, in either cash or reputation terms.

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The lesson for investors here is that the dividends will keep coming for now. But I don't think tobacco is as safe as you might think it is. That might be something for those invested in Neil Woodford's Woodford Equity Income Fund to think about: around 15% of the portfolio is in tobacco.

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