It is easy to forget, given the decline in smoking over the past few decades, the enormous importance to many investors of tobacco stocks.
The UK stock market is home to the world’s second and sixth largest listed tobacco companies – British American Tobacco and Imperial Brands – and the pair are, respectively, the ninth and 39th largest companies in the FTSE-100 index.
And while many institutional investors can now avoid tobacco stocks for environmental, social and governance (ESG) reasons, the pair remain mainstays in the portfolios of thousands of retail shareholders, who favor them for their dividend stream. reliable.
These investors will have been among those who felt the drop in everyone’s stock prices most keenly today.
BAT, at one point, was down 8% and Imps by almost that much.
This wiped out more than £ 6 billion from the pair’s market value.
The drop in shares of these two companies was enough on its own to cut 25 points from the Footsie.
In the United States, shares of Altria – owner of the Marlboro brand in the United States – fell more than 7%.
It follows an overnight report in the Wall Street Journal that the Biden administration plans to lower nicotine in all cigarettes sold in the United States to all cigarettes sold in the United States to levels at which they no longer create dependency.
The Journal said that lowering nicotine levels in cigarettes to “non-addictive or minimally addictive levels” would be aimed at causing millions of smokers to quit or switch to less harmful alternatives like nicotine gum, lozenges or electronic cigarettes.
He said the administration was considering the policy ahead of a deadline for the Food and Drug Administration (FDA), the main health regulator in the United States, to decide whether or not to ban menthol cigarettes.
The FDA must make a decision on this, by law, by April 29.
Neither idea is new.
Scott Gottlieb, who was appointed head of the FDA by former President Donald Trump in March 2017, supported both a ban on menthol – on the grounds that menthol cigarettes are harder to quit – and reduced levels of nicotine in cigarettes.
But the idea was shelved after his departure from the FDA in April 2019.
Yet even the idea that either of these policies could be revived has rocked the industry.
The impact on UK tobacco companies’ revenues in the event of a reduction in nicotine content is difficult to predict as it is difficult to model the impact of such a measure on consumers.
But the United States is the biggest single market for BAT, whose brands include Lucky Strike, Rothmans, Dunhill, and Kent, as well as vaping brand Vuse and heated tobacco brand Glo.
This is the third largest individual market for Imps, whose brands include John Player Special, L&B, Kool, West and Embassy, as well as the Blu vaping brand and the Pulze heated tobacco brand.
A ban on menthol cigarettes is easier to predict.
When the United States last considered a ban on menthol cigarettes, the product was estimated to represent up to a quarter of the profits of BAT, which owns the Newport brand, while it was estimated to represent about a tenth of the profits at Imps.
These figures, however, predate the ban on menthol cigarettes introduced by the EU and the UK, which was still subject to EU regulation at the time, which went into effect in May of. Last year.
In a sense, tobacco investors will be familiar with the political risks involved, especially since the Trump administration. declared war on vaping in September 2019.
Analysts also believe that the FDA may have a hard time finding evidence that a ban on menthol cigarettes in particular is likely to result in significant behavior change.
It is believed that most former menthol cigarette smokers in the EU and UK simply switched to menthol-free varieties of cigarettes after last year’s ban.
It is also possible that if the FDA pushes to reduce the nicotine levels in cigarettes, this move would simply convince smokers that “low nicotine” cigarettes are safe to consume and simply lead them to such brands.
This would defeat the FDA’s purported goal of getting smokers to quit the habit altogether.
In addition, any ban or change in the law could take years to implement, as the tobacco industry is likely to raise legal challenges.
Altria told the Journal: “Any action taken by the FDA must be based on science and evidence and must consider the real consequences of those actions, including the growth of an illicit market and the impact on hundreds. thousands of jobs from the farm to local stores across the country. “
This gives an idea of the battles to come.