Tobacco companies, traditionally, are among the safest investments around.
Their customers, worldwide, number 1.1 billion and they are literally addicted to the product. This guarantees a reliable and relatively predictable earnings stream.
Moreover, as more and more governments ban tobacco advertising and sponsorship, it is difficult for newcomers to enter the market.
As economies around the world began to lockdown, in an attempt to slow the spread of COVID-19, there was even anecdotal evidence to suggest some people were smoking more due to the stressed circumstances.
Accordingly, as global stock markets collapsed at the end of February and the beginning of March, tobacco stocks fell only marginally.
However, that wisdom has been challenged by a trading update from British American Tobacco, the world’s second-biggest quoted tobacco firm after the US giant Philip Morris.
It suggests even this sector has felt the effects of COVID-19.
BAT, whose brands include Dunhill, Lucky Strike, Rothmans, Peter Stuyvesant and Craven A, said its sales in developed markets since the beginning of the year had been strong.
It said there had been little evidence of people ‘down trading’ to cheaper brands and that its US business in particular had been “highly resilient” throughout the crisis.
But it added: “The impact of COVID-19 in emerging markets has been more pronounced, including in Bangladesh, Vietnam and Malaysia.
“In addition, closures and other lockdown measures in certain countries, in particular South Africa, Mexico and Argentina, have persisted longer than anticipated. In South Africa, there are still no signs of the COVID-19 related tobacco sales ban being lifted.”
BAT warned that the hit to international travel from the lockdowns, which hit duty free sales, had also been problematic.
The company added: “Together with the previously announced impact on international travel retail sales, this means that we now anticipate, in total, a full year headwind of [around] 3% from COVID-19 on constant currency adjusted revenue.”
It said that, as a result, it expected full year sales to rise by between 1-3% compared with the 3-5% to which it had previously been guiding investors.
BAT also said it was pushing back the target date for achieving £5bn worth of annual sales from ‘new categories’, such as e-cigarettes, to 2025 – compared with an original target of 2023-24.
The company, whose new category products included the heated tobacco product glo and the vaping product Vype, said COVID-19 had delayed some product launches and led to disruption of supplies in some markets.
The news sent shares of BAT, the ninth-largest company in the FTSE-100 index, down by 4.8% at one point.
Alicia Forry, analyst at stockbroker Investec, said: “Although the downgrade versus previous expectations is minor, today’s statement undermines the highly defensive perception the market has of BAT, which had been reinforced throughout the global crisis up until now.”
Tadeu Marroco, BAT’s chief financial officer, told analysts on a conference call that what the company was seeing in markets like Bangladesh, Vietnam and Malaysia was “pretty much” caused by various lockdown measures.
He added: “When we have stringent measures like curfews, that we saw in a number of those markets, you just promote a disruption of distribution and sales.
“Another factor is that a lot of the consumption in these markets are social consumption. So you go to Vietnam, for example, and…the consumption that happens in hotels, pubs, restaurants, where people get together and smoke, and they were all completely shut down.
“And some of those measures took longer than we were expecting.”
Mr Marroco said BAT was also worried that, when workers – especially casual workers – began to lose their jobs, that could also hit sales.
But he insisted: “This is not the first recession that we have been through. We had something similar, or the same dynamics, let me put it that way, 10 years ago.”
He said BAT also had a number of low-price and ‘value for money’ tobacco brands to which smokers could switch.
Mr Marocco said that, in some markets, the lockdown had even benefited BAT because they had prevented the sale of smuggled or illicit tobacco.
He went on: “You go to Brazil, for example, where you know that illicit is a persistent problem for many years now. Most of these products come from Paraguay. And, with the border closed and the lockdown in place, we are actually seeing an increase in volumes in Brazil as a consequence.”
There was also good news for investors on the dividend front. BAT insisted that unlike its rival Imperial Brands, which recently cut its dividend by one-third, it would not be changing its policy of paying out 65% of earnings to shareholders in the dividend.
That will be particularly important for the millions of Britons who have exposure to BAT through their pensions and life policies. Following Royal Dutch Shell’s shock cut to its dividend, last month, BAT is now the second-biggest dividend payer in the FTSE-100 after BP.
With the latter’s payout now thought to be vulnerable to a cut as well, it may soon become the biggest.