Tobacco Trends – A macro view suggests that demand will remain robust

Tobacco Trends – A macro view suggests that demand will remain robust

Shareholders in British American Tobacco (BATS) and Imperial Brands (IMB) have been experiencing something they may have grown unaccustomed to: protracted share price declines.

Both shares are down by more than a third from their all-time highs (BATS latest share price £35.85, market cap £82 billion, IMB latest share price £26.71, market cap £25 billion), and their investors are jittery.

Reasons to be nervous are numerous. Chief amongst them has been the secular decline in smoking rates in various countries (a good thing from a health point of view, of course). The smoking landscape is changing as awareness of the health benefits of quitting becomes more widespread, as governments step up their anti-tobacco taxes and regulations, and as more and more smokers switch to alternatives such as e-cigarettes.

The Word Health Organisation (WHO) is at the vanguard of the fight against tobacco. In partnership with the US national health protection agency, it implements the Global Tobacco Surveillance System (GTSS). This system provides the best global data regarding the prevalence of smoking.

Earlier this year, the WHO published the second edition of its Global Report on Trends in Prevalence of Tobacco Smoking, using data from the GTSS and modelling forecasts derived from it. The intention of this article is to briefly explore some of the trends discovered by the WHO.

WHO Results

The global prevalence of smoking has been falling since the year 2000, and is projected to continue falling, as can be seen in the table below. By 2025, it is projected that the global prevalence of smoking (among those at least 15 years of age) will reduce from 20.2% in 2015 to 17.3% in 2025. This is short of the WHO’s 15.5% target:

Source: WHO

Despite the steady decline, the pace of decline is actually falling. Indeed, the annual change in the smoking rate per annum for the 2020-2025 period is projected to be only half the annual change seen from 2000-2005.

Looking at the results by age category, we learn that smoking can’t be pigeonholed either as something that teenagers experiment with or as an old-person’s habit.  The most likely age at which to smoke has consistently been from 45-54, and this is forecast to remain true even as overall rates decline.

Indeed, the WHO report shows that these born between 1975 and 1990 have increased their rate of smoking during the course of the study.

The numbers suggest that there is something about being in your forties which increases one’s demand for cigarettes – perhaps this is when stress levels are at their highest!

Source: WHO

Geographically, Europe is the heaviest smoker in the world (29.9% prevalence in 2015) while the Western Pacific Region (Australia and North East Asia) is in second place (28%).

Richer countries smoke more than poorer countries, but the gap is narrowing as high-income countries quit the habit at a faster rate than low-income countries. For example, the only two regions of the world which are not showing significant reductions in smoking rates are the Eastern Mediterranean (North Africa and the Middle East) and the African region.

Projected Numbers of Smokers

This is the critical question for the tobacco industry and its investors. The rate of smoking is only one side of the equation: the other is raw population growth.

The WHO’s estimates for the total number of smokers demonstrate the impact of this growth. The overall number of smokers fell by just 2.5% over the fifteen years from 2000-2015, and is projected to fall by only 1.7% over the subsequent ten years. If the global population was constant, these numbers would be 25% and 23%, respectively!

Reduced numbers of smokers in Europe, the Americas and the Western Pacific have been and will continue to be offset by increased numbers of smokers among the fast-growing populations of the African and Eastern Mediterranean regions (and possibly South East Asian, too). And if population growth forecasts for the developing world turn out to be conservative, as they so often do, then the projected numbers of smokers in these regions will also turn out be conservative.

As the WHO says:

The findings of this report provide additional evidence that while numbers of smokers have fallen in high- and upper middle-income countries, numbers of smokers in low-and lower-middle income countries have steadily risen since 2000.

I have highlighted the most relevant numbers in the table below:

Source: WHO

Conclusion

It’s far too soon to call the top in the global number of smokers, or to think that tobacco companies face imminent extinction. By 2025, the percentage of the world’s smokers from the Eastern Mediterranean region is forecast to reach 10% (from 5% in 2000), while the percentage from Africa will have grown from 4.5% to 7.7%.

Should the population of the developing world continue to compound at high rates, it is conceivable that the number of smokers could actually increase by the middle of the 21st century. Regulatory threats to the industry aren’t going away, and the shift to e-cigarettes may be inevitable, but the underlying demand looks robust.

 

At the time of publication, the author holds a long position in BATS.

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  • comment-avatar

    I could not invest in a company that profits from the addiction to nicotine & tobacco’s damage to health. Just a personal view. 

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    • comment-avatar

      Hi Peter – I complete understand! Cheers for highlighting the issue. You’re certainly not alone in feeling that way.

      Best wishes,

      Graham

  • comment-avatar

    Peter – I understand and respect your view. Nicotine addiction can ruin lives and there is certainly nothing wrong with not wishing to profit from this. I find it curious that it is always the tobacco companies that have the immoral reputation. You may well think that alcohol and defense companies are immoral too – though my experience is that whenever these are mentioned nobody ever objects to profiting from these.

    Alcohol is far easily more abused and yet it’s perfectly fine to profit from these. BAE sells bombs that are used on poor children. Nobody is ever forced on nicotine or alcohol, but I’m quite sure nobody is a willing recipient of a bomb. And yet it’s always the tobacco companies!

    • comment-avatar

      I second Michael’s point. Where do you draw the line once you start analysing company ethics?

      I’ll stick to the financials & leave the morality to our wonderful politicians!

  • comment-avatar

    Any chance you could post an updated commentary on the FDA developments and how it might impact the big players? BATS, for example, supposedly makes 25% of profits from menthol products, so the FDA threatening to ban it seems a serious negative. While part of me feels the ban could be seen as “unamerican” by restricting people’s freedom to smoke what they want, and big tobacco will certainly launch a legal battle that will drag on for years, I still can’t figure out what the impact of this proposed ban will be.

    Any thoughts guys? I’m leaning towards making a contrarian purchase of IMB with perhaps a smaller position in BATS, especially if the FDA bans on flavoured e-cig products has a huge impact on large competitor Juul.

    • comment-avatar

      Hi Dividenddand, just wanted to mention (belatedly) that I noted your comment and of course the FDA ban! I’m personally down 40% versus my initial entry price for BATS.

      The FDA news does create a lot of uncertainty, and I’m not planning to buy any more BATS at this time. On the other hand, I’m not selling either, for a couple of reasons: there are non-menthol BATS cigarettes which could benefit from switching, the menthol ban will take time to implement (if ever), and the BATS share price has already reacted lower. I’m just going to sit on this paper loss for a while. 3% of my portfolio – I can wait it out. If/when I have something more substantial to say on the matter, I’ll certainly write about it here!

      Thanks for the comment.

      Graham

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