I have to be careful with this piece. Over the next five minutes, as you read my views on British American Tobacco (LSE: BATS), you’ll watch me tread an awkward line between explaining why it’s a sound investment, but then you’ll find me contradicting myself by politely ushering you in to another investment direction.
There’s tension with this investment decision because British American Tobacco (BAT) is a very large company, with a dominant market position in over 50 countries. On the flip side, though, the company’s products are under the constant watchful eyes of regulators and controversy surrounding its products are unlikely to go away any time soon — which all costs investors.
Demand elasticity
There’s a really neat concept that you learn in the early years of studying economics. It’s call the Elasticity of Demand. It’s a relatively simple idea. If demand for a product is “elastic”, it means there will be a noticeable fall in demand if the price rises. If demand is “inelastic”, it means there will likely only be a very small fall in demand if the price rises. Alcohol and tobacco products generally fall into the category of having inelastic demand. It’s partly due to their addictive nature, but also to do with their status as consumer staples on the social scene. It would be rare to spend time at any adult social function without seeing people drinking, and/or smoking.
With that in mind, you can see why BAT has a long and fruitful history despite the bad press. You can also see why its share price has risen to significant heights over the past 15 years. The cigarette maker also boasts an attractive dividend yield.
Thank you for smoking
But here’s where I’m left with a bitter taste in my mouth…
Reuters recently reported a BAT spokesperson as saying that overly restrictive regulations (on e-cigarettes) could prevent smokers from being aware of a less risky alternative to smoking, and “this can only be a bad thing for public health”. There are two problems with this statement. Firstly, the World Health Organisation says it needs to see more evidence of the effects of smoking e-cigarettes but that “potential risks warranted stricter regulation to control the sale of e-cigarettes”. In other words, there’s no definitive evidence that they are not harmful products. Second, the statement virtually concedes that the products British American Tobacco is selling are dangerous to your health. This series is looking at stocks that will look after you in more than one way. It seems British American Tobacco doesn’t fit into this category
BATS, however, is not taking the negative publicity lying down. It has already warned that it, and other tobacco companies, must be given a wide enough remit to allow e-cigarette adverts to demonstrate a better safety profile over traditional products. Make of that what you will.
Whichever way you cut it, it seems British American Tobacco is like a big ship sailing through stormy sees. It’s a rocky ride, but it will keep pushing forward. One particularly threatening storm for the company involves Imperial Tobacco Canada (a division of British American Tobacco). It’s the subject of the largest class action lawsuit in Canadian history. You may be happy to invest in a company with this sort of baggage knowing that it’s demand profile is robust. I think I’ll steer clear of it. Put that in your pipe and smoke it!