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tobacco farm

Burning opportunity

03 November 2015

Neil Woodford argues that tobacco stocks will continue to outperform markets.

Is it possible for a sector of the economy to receive unbroken bad press over the course of several decades and yet continue to outperform the market?

The answer, if the sector is tobacco, is that it can do much better than merely outperform. Over the past 25 years, tobacco has simply “blown away” every other sector on the stock market, says Neil Woodford of Woodford Investment Management.

“This sector has been, by a country mile, the highest-returning sector on Wall Street and in the UK for around 25 years,” says Woodford. “I have actually had far too little exposure over that 25-year period.”

Roll with it

Today Imperial Tobacco announced full-year results, which showed a decline in revenue of 4.4% but a 19% increase in profits against the previous 12-month period. The share price of the world’s fourth-largest cigarette company has performed impressively too, gaining close to 50% since the start of 2014.

“Tobacco remains a long-term growth story and I believe that businesses such as Imperial Tobacco are made for the current environment,” says Woodford. “They can continue to grow despite the tricky economic conditions we are likely to experience over the next few years.”

Bristol-based Imperial is the largest holding in the Woodford’s UK equity income portfolio, accounting for more than 7% of assets. That reflects not simply his belief in the company but also his confidence in the sector as a whole. Fears of the sector’s demise are, it seems, grossly exaggerated.

“The share price performance of tobacco stocks has reflected the cash and dividends the sector has been able to produce,” says Woodford. “You might then ask why, given that it’s a declining industry. But the reality is that it’s declining somewhat in developed economies, whereas around the world as a whole, cigarette consumption is increasing more rapidly than global growth, which reflects the ongoing population rise as well as personal preferences.”

Existing tobacco companies are also helped by the fact that there are higher barriers to entry for new challengers; besides, nobody wants to enter the industry, partly due to stigma. This removes some of the pricing pressures companies would ordinarily experience in other sectors, while the industry itself is not capital-intensive.

“It churns out gigantic amounts of cash and all that cash comes back to shareholders,” says Woodford. “Governments love it because people who smoke pay lots of tax, and it is under-appreciated in the markets. From an investment perspective nothing comes close to the attractiveness of the tobacco sector.”

Health warnings

But there are other perspectives on tobacco too, of course, and it is this fact that can unnerve investors. The health implications of smoking are long-recognised and have given rise to a crescendo of legislation, anti-smoking advertising, and tax rises. Should this concern investors?

“The fact is that it is incumbent and embedded in society all around the world – and people enjoy it despite knowing its health implications, in the same way that some people eat or drink excessively,” says Woodford. “When it comes to smoking we have known the implications since the 60s or 70s. It’s a legitimate and highly regulated product.”

“I am not paid by my clients to exercise my moral judgements in my portfolio – I am paid to exercise an investment judgement,” says Woodford. “And while that continues to be the case I will continue to want to hold tobacco stocks in the portfolio, because I believe they will continue to deliver great returns to the investors.”


Neil Woodford of Woodford Investment Management is the manager of the St. James’s Place UK Distribution and UK Equity funds. The opinions expressed are those of Neil Woodford and are subject to market or economic changes. This material is not a recommendation, or intended to be relied upon as a forecast, research or advice. Full advice should be taken to evaluate the risks, consequences and suitability of any prospective fund or investment. The views are not necessarily shared by other investment managers or by St. James’s Place Wealth Management.

Please be aware that past performance is not indicative of future performance. The value of an investment with St. James’s Place may fall as well as rise. You may get back less than you invested. Returns on equities cannot be guaranteed.

Some of the products and investment structures documented within this article will not be available to our clients in Asia. For information on the funds that are available please get in touch.


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