Tobacco shares

[StepOne]

It seriously makes me wonder if I am missing something because the market is not normally so out of kilter with what looks like common sense, by which I mean, this is surely a great opportunity to be buying the tobaccos and yet it is not happening.

Dod

BATS share price was in the 30s right up to early 2016. There were a couple of years of exuberance, but they are now back more or less to the level where they spent most of the first half of this decade. Dividend growth has slowed considerably since then so maybe they are priced about right.

StepOne

[Dod101]

It seriously makes me wonder if I am missing something because the market is not normally so out of kilter with what looks like common sense, by which I mean, this is surely a great opportunity to be buying the tobaccos and yet it is not happening.

Markets can remain irrational for longer than you can remain solvent

Thank you. Yes I know the quote and I suppose we must accept that in this case. I hope my solvency though does not depend on the tobacco shares making a recovery!

Dod

[Dod101]

Dod
You mentioned earlier that Woodford has presumably completed selling his IMB holding. How does one know if this is the case?
monabri

(ps...lie down, the feeling of concord will pass.)

Fair point. I certainly do not know but I got the impression a couple of weeks or so back that these very liquid shares were the obvious ones for him to sell first and I would assume that that phase may now be over.

Stepone

Again I agree. I have the share price history for both tobaccos going back some way, and there seems little doubt that there was a bout of irrational exuberance for some time with both of these shares. However the yield on BAT of around 7% and for Imperial of getting on for 10% seems somewhat pessimistic surely. We are well in to a danger zone by any standards and one would think that the dividends were about to be cut; maybe they are?

Dod

[onslow]

Imperial cash flow/dividend coverage relatively high so I'm not worried about the divi

2 senior executives have recently bought over £500k worth of shares at current prices...

[bjmarren]

Do not fixate on "averaging down", that is a mug's game! Don't get me wrong, I am not saying that you should not buy either Imperial Brands PLC (IMB) or British American Tobacco Group (BATS), only that if you do so it should be because they present a good buying opportunity at the current price, not because you want to make your overall purchase price look better!

With regard to share prices bottoming out, my first and only purchase of BATS was on 10 Jan 2019 since when the value of my holding has increased by 10.38%. Of course, during the last couple of months I have twice topped up my IMB holding and both are underwater price-wise!

So who can tell whether the prices have now bottomed out? Well not me that is for sure and I would wager that neither can you, so forget about trying to "Time the Market"! Just determine whether the dividend looks to be sustainable and the current price looks to be good value. If "Yes", buy. If "No", don't buy!

Ian

Hi Ian,

Thanks for your comments. I should have stated that averaging down wasn't the sole purpose of considering buying more IMB, but it would be a consequence, if I did. It will be my 3rd chunk of IMB if I do, and I've never manged to time the market yet, so I won't be trying this time either. At least half of my HYP shares that I've bought over the last 2 years, when starting my HYP, are underwater price wise, and while it's not nice to see that, I am managing to handle the fact much better now than 2 years ago!

Cheers!

Brendan

[Bouleversee]

Sadly, almost any form of living is not safe, but I would have thought that vaping was safer than smoking tobacco. I suspect that we will be better off by weaning ourselves off tobacco shares entirely. I still hold both BAT and Imperial Brands though.

Dod

Me, too. For a number of reasons, I wish I held neither but am losing so much (48% on IMB) that I don't want to sell at the moment. Should there be any significant recovery, I'll be out like a shot.

Hi B,

That, if you don't mind me saying, sounds crazy. The loss (or profit) you are making is totally irrelevant to the future prospects of the company. If you think IMB is a decent investment at this price, then hold, if not then sell.

StepOne

Of course my loss is irrelevant to the future prospects of the company but it's very relevant to my finances and since I have no idea what is going to happen to IMB's s.p. in the immediate future (have you?) whilst I don't think tobacco companies are going to be the best place to have one's money in the long term, in view of the Woodford shenanigans and the SF ban on vaping which I didn't anticipate (did you?), which could have had a short term effect, I am prepared to risk hanging on at the moment in the hope that at least some of my capital value will be restored and watch for an opportunity to get out which, as I said, I'd like to do for a number of reasons. What is crazy about that?

[Dod101]

Of course my loss is irrelevant to the future prospects of the company but it's very relevant to my finances and since I have no idea what is going to happen to IMB's s.p. in the immediate future (have you?) whilst I don't think tobacco companies are going to be the best place to have one's money in the long term, in view of the Woodford shenanigans and the SF ban on vaping which I didn't anticipate (did you?), which could have had a short term effect, I am prepared to risk hanging on at the moment in the hope that at least some of my capital value will be restored and watch for an opportunity to get out which, as I said, I'd like to do for a number of reasons. What is crazy about that?

I appreciate that your comments are not directed to me, but I have to say that I thought that StepOne's comments were a little condescending and unhelpful. I can entirely understand your feelings, having been bitten so badly. It is incredibly frustrating that the share prices of the two tobacco shares are doing absolutely nothing and as I said on another thread (I think on another thread!) everything seems OK and yet their yields are reflecting what would normally be regarded as great fear of a dividend cut. Completely irrational it would seem and yet........Like you, I may well get out of tobacco if the prices recover but I am not at all sure because I have cannot recall this situation in the past 30 years or so.

Nil desperandum.

Dod

[richfool]

I appreciate I have posted my thoughts on tobacco companies quite some time ago, but will throw them in again.

I cannot see the merit in investing in an industry, the future of which, due to increasing health awareness, education and legislation, must surely be destined for a long term decline. Therefore I avoid this sector.

[idpickering]

I've held both IMB and BATS for years, the former since 17 Aug 2010, the later since 15 Dec 2006. Both were bought to provide me a high yield, with a rising, well covered dividend. The diversification they offered for my HYP was a big plus too. Provided that they continue to pay that rising dividend, I shall continue to hold, and concentrate on the income they give me. That was why I bought them in the first place.

Ian.

[JoyofBrex8889]

https://www.statista.com/statistics/279 ... ince-1880/

Looking at the graph here it appears that we are post peak consumption of tobacco cigarettes.

The decline appears to be fairly slow at this point, so I remain happy to keep invested.

[richfool]

I appreciate HYP'ers are concerned with income, and are perhaps less concerned about capital erosion. But I wouldn't want to gain income today, at the expense of capital loss tomorrow.

When I invest I look to the future prospects of the business, not the past.

[Walrus101]

I've continued to buy these down to 1850. They are now 5% of my portfolio and I'm at my self imposed limit for a single share. Buying at these levels I feel pretty sanguine to be honest. Unless there is a massive fine on it's way that we are unaware of this just feels like a market sentiment shift/ ethical investing and the selling off from our fiend Neil.

On a PE of 7 i view this as a pretty good deal, my own calcs are coming out at 10 and this has given me the opportunity to secure a decent chunk of my future pension income. I do not intend to sell these at all, unless something drastically changes.

[Dod101]

I've continued to buy these down to 1850. They are now 5% of my portfolio and I'm at my self imposed limit for a single share. Buying at these levels I feel pretty sanguine to be honest. Unless there is a massive fine on it's way that we are unaware of this just feels like a market sentiment shift/ ethical investing and the selling off from our fiend Neil.

On a PE of 7 i view this as a pretty good deal, my own calcs are coming out at 10 and this has given me the opportunity to secure a decent chunk of my future pension income. I do not intend to sell these at all, unless something drastically changes.

I presume by 'these' you are referring to Imperial Brands. They look ridiculously cheap I must say and by any rational argument they should surely not fall much further so you may well be right.

Dod

[funduffer]

Woodford has disposed of at least £400m of IMB shares in the past year from his funds to sort out his liquidity problems:

https://www.fool.co.uk/investing/2019/0 ... ford-news/

Is this enough to explain the drop in share price from ~£28 to ~£18?

It can't have helped!

FD

[Dod101]

Woodford has disposed of at least £400m of IMB shares in the past year from his funds to sort out his liquidity problems:

https://www.fool.co.uk/investing/2019/0 ... ford-news/

Is this enough to explain the drop in share price from ~£28 to ~£18?

It can't have helped!

That may of course be the main explanation but it does not explain is why these are now yielding about 10% and show no sign of budging from that level.

Dod

[funduffer]

Woodford has disposed of at least £400m of IMB shares in the past year from his funds to sort out his liquidity problems:

https://www.fool.co.uk/investing/2019/0 ... ford-news/

Is this enough to explain the drop in share price from ~£28 to ~£18?

It can't have helped!

That may of course be the main explanation but it does not explain is why these are now yielding about 10% and show no sign of budging from that level.

Dod

The share price has dropped so the yield has increased, there has been no dividend cut, so the drop in share price explains the high yield.

IMB was still ~£23 in May, so the 'no sign of of budging' is only a month or so old.

Woodford may still be selling, as his funds are frozen whilst he is still sorting out his liquidity, although there cannot be much left to sell!

FD

[monabri]

..........and the selling off from our fiend Neil.

Harsh but fair....a lot of people would agree with you!

[Dod101]

[The share price has dropped so the yield has increased, there has been no dividend cut, so the drop in share price explains the high yield.

IMB was still ~£23 in May, so the 'no sign of of budging' is only a month or so old.

Woodford may still be selling, as his funds are frozen whilst he is still sorting out his liquidity, although there cannot be much left to sell!

FD

Yes I agree and that is, as they say, axiomatic but it still does not really explain why the market is prepared simply to leave them with such a high yield except if there is a ready seller at these depressed levels. I am not selling for instance and I doubt that many on these Boards will be, so maybe it is down to Woodford but again, as you say, I would have thought that his selling might be more or less over by now, since he would surely be selling them very early in the process. It is a conundrum, although as ITH quoted not so long ago, markets can be irrational for a very long time.

Dod

[TUK020]

https://www.statista.com/statistics/279577/global-consumption-of-cigarettes-since-1880/

Looking at the graph here it appears that we are post peak consumption of tobacco cigarettes.

The decline appears to be fairly slow at this point, so I remain happy to keep invested.

I suspect that problem may be more to do with geographic and pricing mix.
My guess is that higher price developed markets are shrinking faster, leading to a less profitable mix. No data though.

[Walrus101]

[The share price has dropped so the yield has increased, there has been no dividend cut, so the drop in share price explains the high yield.

IMB was still ~£23 in May, so the 'no sign of of budging' is only a month or so old.

Woodford may still be selling, as his funds are frozen whilst he is still sorting out his liquidity, although there cannot be much left to sell!

FD

Yes I agree and that is, as they say, axiomatic but it still does not really explain why the market is prepared simply to leave them with such a high yield except if there is a ready seller at these depressed levels. I am not selling for instance and I doubt that many on these Boards will be, so maybe it is down to Woodford but again, as you say, I would have thought that his selling might be more or less over by now, since he would surely be selling them very early in the process. It is a conundrum, although as ITH quoted not so long ago, markets can be irrational for a very long time.

Dod

Well hopefully we've turned the corner now and the red numbers start getting smaller.