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British American Tobacco: can share price hold up as COVID and ESG start to bite?


It’s all happening this week in the world of British American Tobacco (LSE:BATS). The world of big tobacco is not really something we have heard much of during the pandemic.

British American Tobacco recently priced a tender offer for debt securities owned by its subsidiaries. Analysts also seem very optimistic about the company and the sector more generally, including BAT. For example, RBC Capital Markets upgraded its rating of BAT stock an outperform from sector perform.

Will the curse of ESG descend on British American Tobacco?

If there is an issue to be answered, it is the shift in sentiment on the part of bigger investors in the tobacco space. New ESG criteria mean that larger stockholders may be re-considering their position. It is not just the fossil fuels sector which is in the sights of the ESG-minded investor. RBC is suggesting that the tobacco giant should look to buy back its own shares if it has any issue with finding buyers.

RBC Capital has noted that British American Tobacco shares are trading at a distinct discount when compared with other consumer staples stocks.

Be that as it may, the share price seems to have formed a hump pattern between the immediate COVID-19 pandemic crash and 7 August. Investors saw British American Tobacco stock stage a muted recovery in the summer which saw it reach 3273 at the end of May, but that was still down on where it was trading on 6 February (3444). Since then the stock has struggled to maintain its value, forcing us to speculate whether the ESG ghost of Christmas future could be starting to have its effect on Big Tobacco.

COVID has hit tobacco stocks too

Data from GlobalData indicates that tobacco sales should be 8% higher than where they are. This amounts to around $56bn in lost revenue. The sale of plain cigarettes and chewing tobacco has been hit harder. GlobalData reckons it could take several years for firms like British American Tobacco to recover.

Covid has had the effect of getting many smokers to focus on their health, especially their respiratory health. Research from GlobalData found that 26% of smokers were extremely concerned about their health and physical fitness on the wake of the onset of the pandemic (seven weeks in). This could be even bigger now.

Lockdowns have also produced the effect of closing down pubs and clubs, meaning that social pressures for younger smokers have been removed. Then there are rising levels of youth unemployment, which again could impact how much money under-30 smokers have to spend on cigarettes. Projections for the sale of filter cigarettes are still around $651bn for 2020, down from a high of $707bn.

New alternatives are still coming onto the market to challenge the primacy of Big Tobacco. The launch of Taat Lifestyle & Wellness into the US market this month, with a non-tobacco alternative based on proprietary molecular technology, is another sign that new challengers could be poised to quickly erode the size of the global tobacco market in years to come.

The hedge fund market is definitely negative on the fortunes of big tobacco, but shorting the stock has caused some funds to come unstuck over the summer. According to Ortex Analytics, hedge funds lost $49m betting against British American Tobacco stock in September. There’s life in the old dog yet.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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