British American Tobacco ordered to pay £5.5bn damages to smokers: what it means for investors

2nd June 2015


British American Tobacco  has been ordered to pay £5.5 billion in damages to smokers, which would wipe out the company’s annual profit. Laith Khalaf of Hargreaves Lansdown looks at what this means for investors…

British American Tobacco was the biggest faller in the Footsie in early trading this morning, with Imperial Tobacco close on its heels.

This follows a court ruling which orders BAT’s Canadian subsidiary to pay smokers 10.4 billion Canadian dollars (around £5.5 billion) in damages.

That would wipe out around a year’s worth of profits for the tobacco firm.

However BAT have said their subsidiary will appeal the ruling, as have the two other tobacco companies ordered to pay damages (Philip Morris and Japan Tobacco).

Laith Khalaf, senior analyst at Hargreaves Lansdown, says: “The fairly muted market reaction suggests most investors don’t expect British American Tobacco to actually have to stump up the cash, or at least think the appeals process will kick the can into the very long grass.

“The wider implications of the legal battle are more significant than the billions of dollars in damages awarded to the plaintiffs in this particular instance. If this genie gets out of the bottle, it will set a precedent for court cases across the globe against the tobacco industry. The tobacco firms involved are therefore likely to throw the kitchen sink at defending their case.

“British American Tobacco is a popular stock amongst UK income managers because historically, tobacco companies have been able to carry on paying dividends to investors through thick and thin. If the legal tide has turned, that ability may be called into question. We doubt however that there will be any change in tobacco companies’ dividend paying behaviour as a result of this case, until every last possible route of appeal has been exhausted.”

One of those managers Stephen Lamacraft, fund manager with Woodford Investment Management, says that they keep an eye on regulatory developments.

“Litigation risk has been an enduring feature of the tobacco industry for decades and we do keep a close eye on developments. However, tobacco stocks remain a core part of the CF Woodford Equity Income portfolio and we don’t expect the latest class action to impact their attractive long-term investment prospects.”

 British American Tobacco in UK funds

Two out of three UK Equity Income managers hold British American Tobacco; with a forecast dividend yield in excess of 4.6%, and typically defensive characteristics, it’s easy to see why it fits comfortably in their portfolios.

Neil Woodford has the highest weighting with 5.8% of his Woodford Equity Income fund invested in the stock. He also holds 6.5% in Imperial Tobacco; a further 3% holding in Reynolds American takes his tobacco exposure to over 15%.

While his fund may not be having a particularly good day, we wouldn’t expect any knee-jerk reaction from a manager known for his long term investment horizon and his penchant for out-of favour companies


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