Did “the biggest public health intervention in a generation” whack the share prices of tobacco firms? Well, it caused a slight cough.
Imperial Brands – the firm behind Embassy, JPS, Lambert & Butler and Rizla – was a big faller in the FTSE 100 index on Wednesday as Rishi Sunak unveiled his plan to make it illegal for anybody currently aged 14 or younger to buy a cigarette in England in their lifetime.
Gradual prohibition, on the face of it, sounds more serious than advertising bans, higher taxes and removing the cancer sticks from pubs – measures that have been quite effective over the years in driving down rates of smoking. So, yes, investors’ nervousness was understandable.
And, with due respect to New Zealand, the policy pioneer, it’s more significant for these globally active firms when it’s England talking about creating a “smoke-free generation”. If the EU, or even the US, was to follow, one could definitely refer to a new era.
On day two, though, Imperial’s shares recovered all the lost ground and more. That reaction is also explicable. Even if Sunak’s proposal can be successfully enforced (ID checks at corner shops for 24-year-olds in 10 years’ time? Really?) the life expectancy of tobacco firms’ business models won’t be shortened by much.
The economics of this industry remain solid. A chunk of the customers die prematurely or give up but the committed ones tend to be brand-loyal. A ban on advertising saves a fortune in marketing costs and no new competitors ever appear. Obsolescence (one hopes) will arrive eventually but, in the meantime, cash rolls up if the business is run efficiently.
Imperial itself provided an illustration of how much cash on Thursday as it announced a £1.1bn share buyback, on top of last year’s £1bn one. It also spoke about “an ongoing, multi-year buyback programme that will deliver a material reduction in the capital base over time”. Last year’s purchase of shares for cancellation reduced the count by 5.5%; this year’s shrinkage would be 7.8% at the current share price.
Now consider that Imperial’s stock market value is roughly £14.5bn and do the long-term maths. Or let Rae Maile, Panmure Gordon’s sector analyst, work the numbers. “At £1.1bn per annum, the shares [will] have all been retired by 2033, by which point a current UK 14-year-old will be 24 and standing outside a corner shop begging their 25-year-old friend to buy them 20 Embassy,” he says.
In reality, of course, the last share in Imperial will not be available for purchase at today’s price of £16.64. If the buybacks keep coming at the current pace for several more years, the price will have motored long before then if nothing else changes.
But there is an irony here. To the extent that government intervention (or the threat of it) scares investors and keeps Imperial’s share price depressed, the buyback arithmetic improves: the company can cancel more shares for the same sum.
Maile thinks prohibition is unworkable anyway, but here’s his top line: “Long before the last smoker in the UK stops smoking, Imperial can have bought back all of its issued equity.” He has a point.
