Inflation gives Big Tobacco a handy drag - SABC News - Breaking news, special reports, world, business, sport coverage of all South African current events. Africa's news leader.

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Rising inflation is giving Big Tobacco a big leg-up. High cigarette taxes mean the price of smokes is less sensitive to rising input costs. Having customers who struggle to say “no” also makes it easier to charge more.

Couple that with inflation-wary investors prioritising dividends, and companies like $102 billion British American Tobacco and $164 billion Philip Morris International are on a tear. Cementing those gains requires a post-smoking transition plan.

The stock market’s inflation-phobia helps. Tobacco stocks have been insulated from the recent selloff because they pay high dividends. When inflation’s taking root, profits received today are more attractive than a windfall five years hence. BAT is up 30% since the start of December. PMI has gained 24%.

Hence its 13 times forward EBITDA valuation. BAT Chief Executive Jack Bowles hopes to generate a more modest 5 billion pounds in so-called “new category” revenue in 2025 – about a sixth of its forecast total. Hence why BAT is trading on a lower 9 times multiple. On Friday the company said 12% of sales were from non-combustible products, from just 4% in 2017.

The $23 billion London-listed purveyor of Gauloises hasn’t set revenue targets, aiming only for a “distinctive presence” in non-smoking products. After a 17% jump since December, its shares are now trading on 7 times EBITDA. Investors should not take that as a sign of long-term good health.– British American Tobacco said on Feb. 11 that adjusted revenue rose 7% to 26 billion pounds last year, broadly in line with analyst consensus supplied by the company.

 

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