Up in Smoke? Assessing the Economic Case for Investing In, or Divesting From, Tobacco Companies
Considering that wealth-maximising investors are generally not willing to sacrifice financial returns in favour of ethical considerations, this paper seeks to investigate the economic case for investing in, or divesting from, tobacco companies. After analysing the financial performance of some of the world's largest tobacco companies, this paper finds that the demand for traditional tobacco products (e.g., cigarettes) is in decline due to tightening tobacco regulation and increasing health awareness, and as a consequence all but one of the companies analysed experienced declines in tobacco sales (in dollar terms) over the period FY2014- FY2020. In addition, the results show that the tobacco companies in question are becoming increasingly inefficient at generating profits, and that market sentiment towards these companies' growth potential has diminished. Putting aside the possibility of tobacco companies entering the cannabis market, the evidence suggests that the future profitability of these companies depends on whether they will be able to increase the sales of Next Generation Products (“NGPs”) to significantly offset the decline of traditional tobacco sales, which they have not yet been able to do. Regulation could also dramatically affect the future success of NGPs. Given that financial markets tend to reward the stock prices of fast-growing firms, and given tobacco companies' disappointing revenue growth, the economic case for investing in tobacco companies is currently characterised by (significantly more) uncertainty and risk. In other words, it is increasingly unclear whether tobacco companies will be able to achieve growth in future; as a result, their shareholders could incur capital losses.
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