Investing in the Tobacco Industry – why regulation will not curb the great investor returns. 8


Investing in the tobacco industry is a topic that divides people. Many people think it is not morally right to invest in the tobacco industry. Whilst this is true, it is difficult to draw the line on morals when making investing decisions. Holding high morals when investing will make you rule out a wide array of industries such as tobacco, alcohol companies, sugar companies, banks, supermarkets (that exploit zero hour contracts), technology companies (that exploit third world workers) and natural resource / commodity companies (who pay their workers paltry sums for working in the mines all day).

Having good morals makes it more difficult for you in the investing world. But I am not here to give you a lecture on morals. If you are one of those people that are adamant you will never invest in tobacco stocks, fair play to you, but this article is probably not for you.

From an investors point of view, tobacco companies have produced excellent returns over a number of years. These companies are good solid dividend payers and have produced above average growth rates as well.

One of the best things I like about the tobacco sector is it is a defensive industry. Thus Tobacco companies are not affected by the macroeconomic going-ons of the global economy. You can be assured that tobacco companies will still sell cigarettes when we are in a recession or not, interest rates are high or low and whether their is inflation or deflation. In short, tobacco companies are a safe bet.

 

Regulation Has Been Good For Tobacco Stocks

The one thing that has always haunted tobacco companies (for the good of society) has been regulation. The Tobacco industry have over the years gone through so much regulation from advertising bans to smoking bans to bans on displaying cigarettes on a shop counter.

So is it still wise to invest in tobacco companies when this sector is so subject to government regulation and interference?

Ronald Reagan said that the 9 most dangerous words in the english language are “ I’m from the government and I’m here to help”. This is absolutely correct apart from the fact that they are 11 words in the sentence. Just shows you government can’t do anything right!

If the worst thing that can happen is the government trying to help, the best thing you can hear is the government is trying to stop you. Because government are so bad a what they do, it certain to give you a helping hand. This does sound like a ridiculous proposition but in reality this is true.

Lets look at the history of the Tobacco sector over the past 20 years. i have put the chart below so please click on it to get a larger and clearer version.

(Click on Picture to enlarge). Above graph shows that whenever government enforces regulation, tobacco stocks always seem to spike higher.

(Click on Picture to enlarge and make it clearer). Above graph shows that whenever government enforces regulation, tobacco stocks always seem to spike higher)

 

On the chart above a number of events have been marked. The EU parliament bans tobacco advertising and sponsorship (May 1998), Health warning of Cigarette packs (Jan/Feb 2003), World Health Organization Control on Tobacco (Feb 2005), Tobacco advertising and promotion act UK (July 2005) and prevention of smoking (June 2009).

All these things government has done to try and stop smoking and tobacco companies shares are seen to skyrocket. why is this so? Imagine you were running a tobacco company. There is never going to be a new competitor. As a result of high government regulation, nobody wants to enter this sector – the liabilities and costs are too great. And although no new competitors are going to enter the market keeping the supply level ‘rigged’ in favour of the incumbent companies, demand will always be there as the product is addictive.

So if you own a Tobacco company, you won’t have any new competitors, the product is addictive and the government has come along and said that i know what I’m going t do to you, I’m going to stop you from spending on advertising and marketing. oh wow, how bad can it be?

Government intervention has turned tobacco companies into wonderful businesses.

Even Neil Woodford Agrees

One of Britain’s best fund managers, Neil Woodford has has this to say about the Tobacco industry, ’One of the most dependable sources of dividend income for the equity investor is the tobacco sector, which features prominently in the portfolio. Over the past 25 years, the tobacco sector has an unsurpassed track record of delivering superior long-term total returns, based on attractive starting yields and consistent, sustainable dividend growth.’

From an investing point of view, it is wise to invest in companies or sectors the government interferes in and tries to stop. You should instead be very very frightened if the government turns up and say that they are going to help us!

Happy Investing!.

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