Investing in fags, vapes and hash

[Dod101]

Of course it was and I have never denied that the loss over the last three years has been significant. All I am pointing out is that over the long term the tobaccos have proved to be good investments and that in investing, three years is not very long. In fact if you take the chart over say a 20 year period, the peak in tobacco share prices was what Alan Greenspan called irrational exuberance or what might be called froth. The current yield on Imperial is ridiculous unless we are going to have a dividend cut. Maybe we are.

Dod

[Itsallaguess]

So up to Jan 2017 holders would have been very happy, but since then its been all downhill big time....with significant losses on their Jan 2017 portfolio valuation. If that was one of my investments I wouldn't be happy with that, but then I would likely have dumped it at no more than 10-15% off its high to protect against further losses (ie the situation that has actually happened).

Well if the primary issue here is capital-erosion of a single portfolio holding, then I think that's just something that's highly likely to occur to anyone investing in the stock market over long periods.

But even with that said, it's also something that's likely to be offset somewhat by a diversified portfolio that is likely to contain stocks that would pick up much of the slack lost with some individual components over many years too..

That's certainly been the case with my 2.5% portfolio exposure to tobacco shares over many years, although I accept that we are all likely to have different mixes in our holdings, and different investment time-scales to compare.

But it's also interesting that you highlight an alternative approach that exposes your whole portfolio to the potential for 'baked-in' losses, and I guess there's a decision to be made there, to see if that universal-approach to selling anything that loses 10% of it's value over and above general market noise is likely to actually erode portfolio-capital much less over many years than simply taking a more 'portfolio-based' view of the whole shebang...

I just find that the more that time passes, the easier it gets to look at things through a much more 'portfolio-based' set of lenses...

Cheers,

Itsallaguess

[TheMotorcycleBoy]

In my day job I work quite closely with a partner company. The partner company is a $bn group. Up until 5-years ago maybe 80% of their exposure was as a tier 1 supplier to the tobacco industry. They are one of only two full-spectrum suppliers to the tobacco majors in their area, which is critical to the tobacco supply chain.

Over the last 5-years they have done two things:
1) Diversified hugely, to the extent that now they are only 50% exposed to tobacco. (I am involved in this non-tobacco bit).
2) Diversified within tobacco, to support a) alternative delivery systems, b) reduced harm traditional delivery systems.

The people running my partners are high calibre & make rational decisions This tells me that they expect continued tobacco decline, and they are unsure whether that will be terminal or may perhaps include alternative delivery systems. Overall their investments have been pretty heavily skewed to be away from tobacco, but they are also positioning for simultaneous end game harvesting. When rational insiders are making these calls it is a brave decision to skew personal investments towards tobacco.

This probably reflects your partners' awareness of the £££ impact of the decline in smoking numbers. However, I'm curious as to whether the emergence of vaping is making this more difficult to fully analyse. For instance the chart visible from this link indicates roughly a 5% decline in numbers from 2011 to 2018.

https://www.ons.gov.uk/peoplepopulation ... 11-to-2018

however it's unclear, at least to me, whether this is inclusive of e-smokers.

(The chart linked here however https://www.ons.gov.uk/peoplepopulation ... at-britain shows recent growth in e-smoking).

My personal view is that smoking will continue to decline, now that risks of NGP have been exposed, and even if this is not the case higher taxation, as a knee jerk response to this will make firms like IMB and BATS even less profitable.

I have no particular insight into marijuana as an investment alternative, so no great opinion on that. Other than that, as I am sure anybody who knows youngsters will confirm, that it is as easy to grow as tomato plants and very cheap to buy already in the UK.

From my own experience as a teen I can vouch for the fact that it is very easy to grow such plants (myself and a mate grew one). However the plants grown will be low grade. A more tropical environment is required for high yields. Hence we hear of cases of large warehouses and barns which are periodically reported after being swooped by the drugs, due to detection of the lighting level and thermal image profile giving the game away.

You can see in the first pic in this link the huge flower buds in some of these plants. It is the buds where the active ingredients (THC and CBD) are, and it is their production which requires expertise in cultivation.
https://www.dailymail.co.uk/news/articl ... -weed.html

Still, it's tempting to believe that if legal, it would a commodity type cash crop, and not exactly a WB style moat business.

However, the science behind the cannabis is very complex, so too is the study of it's potential marketplace and legal usage. We are not just talking about one or two chemicals here. Here's a quick summary, picked from the internet of some of the different areas, which I think make this a very interesting topic:

THC: the A-list celebrity of cannabinoids
Cannabinoids are chemical compounds that interact with receptors in your brain. You’ve probably heard of delta-9-tetrahydrocannabinol (THC), the cannabinoid that gets you high. “THC binds to cannabinoid receptors in the brain, and this binding affects the production of dopamine, a brain chemical or neurotransmitter that activates reward circuits in the brain that produce the high,” Dr. Hill says. Dopamine is the same chemical your brain releases when you play Call of Duty or bone your Tinder date. It basically gives you a hit of pleasure.

But before you equate weed, sex, and CoD, just stop for a minute and appreciate the fact your body is designed to receive molecules from the cannabis plant... and that you have these cannabinoid receptors even if you’ve never smoked pot. Intelligent design might have something to it, after all.

“Endocannabinoid receptors evolved in every vertebrate animal in the world and are receptive to cannabinoids, so it does show you how universal it is, that we all need that system,” Hyman says. “Humans discovered (cannabis) thousands of years ago and have been selecting it for traits that best fit them medicinally. We found a plant that mimics our endogenous hormones, and the result is thousands of strains of high-potency cannabis throughout the world.” According to Hyman, just as weed is found worldwide, cannabinoid receptor sites are found everywhere in your body, but they’re concentrated in the brain (the CB1 receptors) and immune system (the CB2 receptors).

Basically, humans found something that made them feel good, then bred it specifically to make them feel better, and now we've reached the highest possible level of evolution: the bicycle pot delivery guy.

You down with CBD?
More than 80 cannabinoids have been discovered, and that’s only counting those in plants. But plants are far from the only source of these magical feel-good substances: “A few cannabinoids, like delta-11-hydroxy THC, are only found in our body, when our liver converts them,” Leightson says.

The second most common cannabinoid is cannibidiol, or CBD, which you might have heard about in the news because of its success as a treatment for children with epilepsy. “CBD does not produce psychoactive effects,” Dr. Hill notes, which for the layman means it doesn’t get you high. In another display of the evolutionary superiority of human intelligence, there are now non-psychoactive strains of cannabis that are low in THC and high in CBD. This is great news for people who have seizure disorders, anxiety, chronic pain or autoimmune disorders -- all of which CBD can alleviate.

“CBD is the more medicinal compound,” Leighton says. “But in many cases, THC is just as medicinal, depending on the ailment. There’s all these different compounds working together, and they work better with all the compounds present.”

from: https://www.thrillist.com/health/nation ... at-they-do

Note that in addition to 2 different families of active ingredient, we have 2 different marketplaces: recreation and medicine, and very broadly speaking 2 different psychoactive effects hallucinogenic (THC mainly) and relaxing (CBD).

More information on THC and CBD uses and differences here.

Matt

[gbjbaanb]

Hi Matt, I'm not really an ethical investor but I have (and will continue to) avoid investing in cigarettes or any of these new vaping developments. I think its a disgusting habit and I wouldnt want to provide ANY support to the industry whatsoever. What with the risk of cancer and these new vaping lung problems that people are having, why would you invest in that ?.

ATB

Pref

Ethical investing is a bit daft - unless the bad company issues more stock or a bond (that you then buy), then buying their shares are a zero-sum game. They've alreayd received the capital support from the original purchasers, from that point on the shares are just shuffling deckchairs - the company gains and loses nothing from you buying them.

[Dod101]

My personal view is that smoking will continue to decline, now that risks of NGP have been exposed, and even if this is not the case higher taxation, as a knee jerk response to this will make firms like IMB and BATS even less profitable.

It is very easy to talk oneself into a downward spiral of negativism but I cannot agree with the comment quoted. You would think that the tobacco companies had fallen off a cliff from this comment but in fact they are still very profitable. They are in a declining market that is for sure but they are able to at least maintain their profit margins on tobacco which is highly profitable for them at the moment. Both tobacco companies have debt which is probably uncomfortably high and that I think is the main short term risk to their profitability, but interest rates show no sign of rising so they should be able to service their debt quite easily. Repaying it might cause some problems for the dividend in the short term, but to use the expression 'even less profitable' is IMHO very misleading.

Dod

[dspp]

In my day job I work quite closely with a partner company. The partner company is a $bn group. Up until 5-years ago maybe 80% of their exposure was as a tier 1 supplier to the tobacco industry. They are one of only two full-spectrum suppliers to the tobacco majors in their area, which is critical to the tobacco supply chain.

Over the last 5-years they have done two things:
1) Diversified hugely, to the extent that now they are only 50% exposed to tobacco. (I am involved in this non-tobacco bit).
2) Diversified within tobacco, to support a) alternative delivery systems, b) reduced harm traditional delivery systems.

The people running my partners are high calibre & make rational decisions This tells me that they expect continued tobacco decline, and they are unsure whether that will be terminal or may perhaps include alternative delivery systems. Overall their investments have been pretty heavily skewed to be away from tobacco, but they are also positioning for simultaneous end game harvesting. When rational insiders are making these calls it is a brave decision to skew personal investments towards tobacco.

This probably reflects your partners' awareness of the £££ impact of the decline in smoking numbers. However, I'm curious as to whether the emergence of vaping is making this more difficult to fully analyse. For instance the chart visible from this link indicates roughly a 5% decline in numbers from 2011 to 2018.

Matt

1. They are a global company, the ££ is of very little interest to them. They are taking a global view of this. They are backing multiple horses in the 2a and 2b bit of the puzzle because (imho) they know that it is too soon to know what the outcome(s) will be in the major markets - and it may be different in different markets.

2. Beer requires a lot of science to fully understand, and good engineering to make cost effectively. However you and I can still make it in our sheds and consume it quite enjoyably even without all that knowledge. Ditto weed, and hot greenhouses are not unknown. Whether that will impair commercial weed operations I don't know.

Personally I sold out of tobacco in the course of this year. I guess in a few years I will know whether that was a good call, though I did it for other reasons as I will set out in my year end review.

regards, dspp

[TheMotorcycleBoy]

My personal view is that smoking will continue to decline, now that risks of NGP have been exposed, and even if this is not the case higher taxation, as a knee jerk response to this will make firms like IMB and BATS even less profitable.

It is very easy to talk oneself into a downward spiral of negativism but I cannot agree with the comment quoted. You would think that the tobacco companies had fallen off a cliff from this comment but in fact they are still very profitable.

I've only got any FA experience with IMB, Dod, but I guess that how people view their profitability is a little bit subjective. For instance, this is some figures gleaned from a spreadsheet I drew up on them back in July:



My observations are that they struggle to lift their OM above 8%, likewise ROCE is probably not much higher than their cost of capital (remember they spend a lot of their dividends). Additionally reasonable ROE figure is due to their level indebtness reducing the BV of their equity.

[PrefInvestor]

Hi Again All, Well it seems to me that we likely have two groups of people who see the prospects for the tobacco companies very differently.

Group A are likely to have had positive experiences with investing in the stocks over the years, be positive (or at least agnostic) to smoking/vaping/cannabis etc., think that any health issues are peoples personal responsibility and just see these stocks as good companies who have been having a hard time for the last 3 years and are hoping (expecting ?) that they will recover.

Group B do not have those positive investing experiences but see only the dire performance over the last 3 years, are anti smoking/vaping/cannabis in all its forms seeing them as a blight on society and a threat to peoples health, see the reduction in smoking within the population (at least in the developed world) as a good thing and hope it will continue apace – which clearly wont be good for the prospects of the tobacco companies.

Who is right and who is wrong ?. It’s a bit like Brexit – you know which group you are in and are likely going to stay there whatever anyone else says. I do think that demographics are likely to work in favour of Group B, but I would say that wouldn’t I……

ATB

Pref

[Dod101]

As you can guess I am more or less in Group A certainly as regards my investing experience. I have never smoked and never would but it is up to individuals whether they smoke or not. But I am not a dedicated Group A member. If the price of either recovers it is perfectly possible that I would at least reduce my exposure. The trouble is that it is becoming increasingly difficult to find decent income producing shares.

Currently though I will simply hang on to what I hold and enjoy the dividends.

Dod

[TheMotorcycleBoy]

Hi Again All, Well it seems to me that we likely have two groups of people who see the prospects for the tobacco companies very differently.

Group A are likely to have had positive experiences with investing in the stocks over the years, be positive (or at least agnostic) to smoking/vaping/cannabis etc., think that any health issues are peoples personal responsibility and just see these stocks as good companies who have been having a hard time for the last 3 years and are hoping (expecting ?) that they will recover.

Group B do not have those positive investing experiences but see only the dire performance over the last 3 years, are anti smoking/vaping/cannabis in all its forms seeing them as a blight on society and a threat to peoples health, see the reduction in smoking within the population (at least in the developed world) as a good thing and hope it will continue apace – which clearly wont be good for the prospects of the tobacco companies.

Who is right and who is wrong ?. It’s a bit like Brexit – you know which group you are in and are likely going to stay there whatever anyone else says. I do think that demographics are likely to work in favour of Group B, but I would say that wouldn’t I……

ATB

Pref

I disagree slightly in so far as I believe that your classification is overly simplistic. I am of another group. The key difference is that of cannabis.

Group 'C'

1. I believe the use of nicotine related products will probably decline, and/or be taxed more heavily
2. I believe there is potential growth in the cannabis marketplace (THC and CBD), in recreational and medicinal areas. I believe, in the same way that Guiness and Baileys cannot easily be made in back yard sheds, that the diversity of chemicals and their preparations mean there is potential for chemical engineering industries to create moat like business based on brands and patents.

Matt

[PrefInvestor]

I disagree slightly in so far as I believe that your classification is overly simplistic. I am of another group. The key difference is that of cannabis.

Group 'C'

1. I believe the use of nicotine related products will probably decline, and/or be taxed more heavily
2. I believe there is potential growth in the cannabis marketplace (THC and CBD), in recreational and medicinal areas. I believe, in the same way that Guiness and Baileys cannot easily be made in back yard sheds, that the diversity of chemicals and their preparations mean there is potential for chemical engineering industries to create moat like business based on brands and patents.

Matt

Hi Matt, Hmmmm dont know, my groupings were about how investors felt about tobaccos and the stocks concerned. Your point seems to me to be specific to cannabis, my Group B would hate that as much as tobaccos. Group A would likely be in favour, especially if it benefited the IMB/BATS share price. Not sure that I see a third group that is distinct from A and B. Rather I would see your Group C as likely a subset of Group A. But anyway no matter its not important.

In my post what I was really just trying to point out was the major divide that I think exists in investor's views on these stocks.

On the subject of cannabis I know that the likes of IMB & BATS have been looking at cannabis related products. But to benefit they would have to be a manufacturer of cannabis related products surely, because they make their money by making stuff and dont do the retail side I dont think. Obviously Cannabis is a big deal in the US & Canada already and Im guessing that there will be numerous cannabis product manufacturers there - no idea if IMB/BATS are doing that already. If not then then may face stiff competition if they want to get into the market...?

ATB

Pref

[TheMotorcycleBoy]

I disagree slightly in so far as I believe that your classification is overly simplistic. I am of another group. The key difference is that of cannabis.

Group 'C'

1. I believe the use of nicotine related products will probably decline, and/or be taxed more heavily
2. I believe there is potential growth in the cannabis marketplace (THC and CBD), in recreational and medicinal areas. I believe, in the same way that Guiness and Baileys cannot easily be made in back yard sheds, that the diversity of chemicals and their preparations mean there is potential for chemical engineering industries to create moat like business based on brands and patents.

Matt

In my post what I was really just trying to point out was the major divide that I think exists in investor's views on these stocks.

Definitely agree.

On the subject of cannabis I know that the likes of IMB & BATS have been looking at cannabis related products. But to benefit they would have to be a manufacturer of cannabis related products surely, because they make their money by making stuff and dont do the retail side I dont think. Obviously Cannabis is a big deal in the US & Canada already and Im guessing that there will be numerous cannabis product manufacturers there - no idea if IMB/BATS are doing that already. If not then then may face stiff competition if they want to get into the market...?

Indeed. I can't comment on BATS exact position here. I know that IMB has purchased both Auxly Cannabis Group and Oxford Cannabinoid Technologies (OCT), within the last year or so. It would be nice to get some news from them on these investments. But is it a case of too little too late?

Matt

[MaraMan]

I have been messaging on TLF the past couple of years that I thought the tobacco co's were facing a long decline, much to the ire of many on here who disagreed. I note that a recent IC article https://www.investorschronicle.co.uk/sh ... of-vaping/ stated that many analysts felt that with the large debt burden these companies carry they suspect that their current dividend policies are under threat.

Those true believers on here have seen capital deterioration over the past couple of years and may well now see a change in dividend policy. With all that I cannot see how this makes these companies a sound investment now anymore than they were a couple of years ago (with hindsight). I am very glad I got out when I did, although that was only based on my personal experience on my travels of the obvious reduction in smoking, so hardly a good basis to convince anyone else I accept .

I did see (and smell) a great deal of cannabis use on a recent trip to the West Coast USA, however I tend to think that this income will never replace the lost regular cigarette revenue.

MM

[dealtn]

...based on my personal experience on my travels of the obvious reduction in smoking, so hardly a good basis to convince anyone else I accept .


MM

I am very happy to consider my personal experience when it comes to investment decisions, but generally seek confirmation from elsewhere. IMB isn't a company with falling revenues, and indeed the latest "plunge" in its share price came on the back of expectations of revenue growth (admittedly small at 2%, and below previously guided market expectations)

[Dod101]

I have been messaging on TLF the past couple of years that I thought the tobacco co's were facing a long decline, much to the ire of many on here who disagreed. I note that a recent IC article https://www.investorschronicle.co.uk/sh ... of-vaping/ stated that many analysts felt that with the large debt burden these companies carry they suspect that their current dividend policies are under threat.

Those true believers on here have seen capital deterioration over the past couple of years and may well now see a change in dividend policy. With all that I cannot see how this makes these companies a sound investment now anymore than they were a couple of years ago (with hindsight). I am very glad I got out when I did, although that was only based on my personal experience on my travels of the obvious reduction in smoking, so hardly a good basis to convince anyone else I accept .

It would take a fairly disinterested investor not to know that the tobacco companies face a long decline, so nothing new there. The dividend policy of IMB has already changed but I see nothing to suggest that either tobacco company is suddenly going to decide that reducing their debt will be best achieved by cutting their dividend. That would really hammer their share prices and is I imagine something they would prefer not to see happen. When sentiment is against a share it is very easy to find reasons to question the investment case and that is one reason I think for the decline in the share price of the last two or three years. Of course as I have already said in this thread, there was a lot of froth in the share prices two or three years ago. As a current investment it would not be difficult to construct an investment case for at least IMB.

Dod

[gbjbaanb]

[*]I believe there is potential growth in the cannabis marketplace (THC and CBD), in recreational and medicinal areas. I believe, in the same way that Guiness and Baileys cannot easily be made in back yard sheds, that the diversity of chemicals and their preparations mean there is potential for chemical engineering industries to create moat like business based on brands and patents.[/list]
Matt

4 weeks (to get a fizzy brew) will get you lovely Irish stout(made with UK hops and malt, obviously). Frankly I prefer a good milk stout, much, much nicer.
As for Baileys... well, its just whisky and cream blended together. Here's a the simplest recipe I could find, others involve a little more tinkering.

But back on-topic I think the big tobacco players are going to struggle to keep up with upstart cannabinoid producers who will have a far more "cooler" brand and modern marketing methods. They are likely to get a lot mroe attention from investors (ie share price pumping) than the big tobacco companies will be seen, even if they have good cbh products, to still be weighed down with the old products.

And maybe one day someone will produce a cannabis plant without the CBH in it, and then people will home-brew their own joints, (using the 'approved' plant, obviously, and not replacing them with the proper ones ) and nobody will buy the commercial stuff that's made with the 'same' non-cbh plants that they grow themselves at home.

[TheMotorcycleBoy]

...based on my personal experience on my travels of the obvious reduction in smoking, so hardly a good basis to convince anyone else I accept .


MM

I am very happy to consider my personal experience when it comes to investment decisions, but generally seek confirmation from elsewhere. IMB isn't a company with falling revenues, and indeed the latest "plunge" in its share price came on the back of expectations of revenue growth (admittedly small at 2%, and below previously guided market expectations)

Indeed if you look at the table I posted earlier you'll see that revenue is rising slightly now (after dipping slightly in 2014, 2015), although I must add that I'm unsure whether this is a "reported currency" issue (ie. $ vs £ etc.). I am most certainly not a decent enough "analyst" to know this!

The thing I found more alarming is the -ve retained earnings column and how RE is, if anything, getting more negative. Surely this implies divs and buybacks are not being funded on truly "distributable reserves?"

Matt

[dealtn]

I'm much more interested in cash flows than earnings.

In both 2017 and 2018 Net Cash Flows Generated from operating activities were approx. £3bn, with debt interest around £500mio. That left plenty over to pay £1.6-1.7bn in dividends and repay some of the maturing debt.

Earnings are much lower due to amortisation of intangible assets, which is an accounting, not a cash, entry.

[MaraMan]

It would take a fairly disinterested investor not to know that the tobacco companies face a long decline
Dod

Well Dod that may be true as I claim no prescience, but there are clearly plenty of them on here over the past couple of years as I was shouted down by them as they increased their holdings.

Its very difficult to draw too many conclusions from abbreviated accounts of companies as large as these, there is a lot of smoke and mirrors, as it were

The IC article notes that in the first half of this year IMB saw its cigarette sales fall by 6.9% and BAT by 3.7%. It won't take long for those scale of falls to have a material impact on revenues.

MM

[TheMotorcycleBoy]

I'm much more interested in cash flows than earnings.

In both 2017 and 2018 Net Cash Flows Generated from operating activities were approx. £3bn, with debt interest around £500mio. That left plenty over to pay £1.6-1.7bn in dividends and repay some of the maturing debt.

Earnings are much lower due to amortisation of intangible assets, which is an accounting, not a cash, entry.

However, with all else being equal, doesn't diminishing "retained earnings" year on year, indicate that after paying debt, capex, dividends etc. etc. they are eating into their cash. IOW their cash flows from operations are, on balance, outweighed by those outflows from investing and financing?

Like I've said in the past, I'm not an expert in accountancy, so go easy!

Matt