Tobacco industry: investments continue to flourish despite harmful health consequences

According to the World Health Organization (WHO), there are 1.3 billion tobacco users in the world and they are expected to be 1.25 billion in 2025.

This small decline may be surprising considering the harmful health consequences of tobacco use (more than 8 million deaths a year worldwide), public health policies to curb its consumption (prohibition of advertising, very high tax rates) or the costs induced by its consumption in terms of health spending, higher than taxes collected.

A surprisingly stable market

Although anti-smoking policies are being developed and strengthened globally, and despite their negative effects on public health and the environment, the tobacco market remains surprisingly stable.

According to the French analysis firm Sherfithe world tobacco market represented in 2020 approximately 1 trillion dollars (taxes included), of which 744 correspond only to cigarettes. The figures have slightly increased since 2017 in value terms although consumption volumes are declining. However, this trend remains subject to strong geographical disparities.

The global tobacco market is dominated by five large companies: China National Tobacco (43.6% market share by volume, mainly in China, where the company has a monopoly market share of 97%), Philip Morris International (United States, 13.9%), British American Tobacco (UK, 12.2%), Japan Tobacco (Japan, 8.5%) and Imperial Brands (UK, 3.5%).

Recently these companies have diversified into the so-called reduced risk productssuch as devices to heat tobacco or vapers, and have even integrated new sectors of activity, such as pharmaceuticals or cannabis.

In 2020 the products of reduced risk of Philip Morris represented the 24% of your turnover (up from 14% in 2018) and CEO Jacek Olczak called for a 10-year ban on cigarettes as part of the company’s “smoke-free world” strategy.

In 2021, Philip Morris announced the €1.3 billion acquisition of Vectura, a British manufacturer of medical inhalers whose products are used, among others, to treat the toxic consequences of cigarette consumption. Now, one of the main battles of tobacco companies is the recognition of the specific status of their products low risk to obtain lower taxation, despite the fact that the WHO strongly contests the reduced nature of these risks.

Given the negative effects of tobacco consumption, one might ask if the financial situation of tobacco companies has not been affected. The answer is no; in fact, its operating margins (the ratio of earnings before interest and taxes to turnover) remain very large. In 2020 it was 17.7% for Imperial Brands and 43.5% for British American Tobacco. These margins are, on average, 12% higher than those achieved by the 500 largest US companies from all economic sectors that make up the S&P 500 stock index. They have even been improving over time and the pandemic has not had a negative impact in consumption.

This has allowed the companies to pay very generous dividends in 2020: $7.4 billion Philip Morris, $6.5 billion British American Tobacco, $2.6 billion Japan Tobacco and $2.3 billion Imperial Brands.

unsuspecting investors

At a time when socially responsible investing (SRI) and environmental, social and governance (ESG) criteria seem to have become an obligation for asset managers, one might imagine that the tobacco industry would be progressively excluded from investment strategies. investment from institutional investors. However, also in this case the reality is different.

Institutional investors represent the bulk of tobacco shareholders, with the exception of Japan Tobacco, in which the Japanese state owns 37.6%. If we look at the five largest asset managers In the world, we see that the Americans BlackRock and Vanguard, and to a lesser extent State Street, have a strong presence in the capital of this sector, while Fidelity, and especially the German Allianz, remain on the sidelines.

With this, we can measure, beyond voluntarist speeches, the road that remains to be traveled towards the generalization of SRI and ASG criteria in the asset management industry.

An unprofitable investment

It is even more curious that investing in tobacco does not seem, in retrospect, a very good business compared to the S&P 500 (although the evolution when integrating the dividend distribution is still less bad).

Will the promises of the tobacco companies of a “smoke-free world” and the addictive characteristics of their products continue to be more convincing that WHO assessments of the hazards of food products reduced risk.

Jerome CabyProfessor of Universities, IAE Paris – Sorbonne Business School and Pierre-Yves LagroueMaitre de conférences en sciences de gestion, IAE Paris – Sorbonne Business School

This article was originally published on The Conversation. read the original.

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