Home > Uncategorized > OfSmoke price cap proposal – writing on the wall for tobacco stocks?

OfSmoke price cap proposal – writing on the wall for tobacco stocks?

The publication this week of a radical new proposal to impose  price cap regulation on tobacco companies (TC) poses a major challenge to the industry if adopted by governments in the UK and other high tax countries.  The proposal is to restrict profitability to a similar level to other consumer goods companies.  The TCs currently make huge profits of up to 67% (two thirds) of revenue in the UK.  They can do this because in a high tax market with strong marketing restrictions, they have a monopoly position (Imperial 44%, JTI 35%) and can increase prices which most smokers will blame on the government.  It will come as a surprise to many smokers that the UK is one of the most profitable markets for tobacco companies.

With 95% of the UK market controlled by the Big 4 tobacco companies, they make over a billion pounds profit, at an estimated average rate of 51% of revenue.  If profit were capped at 20% of revenue, then the reduction in profit would be over £660m, reducing profit to £424m.

It remains to be seen how the government responds to this proposal.  There has been wide media coverage, and in a time of austerity the Treasury is likely to see the attraction of taking £500m extra taxation from the tobacco industry which cannot be passed onto the smoker by the companies.

For pension fund managers, this proposal has huge implications.  If there are any signs that government intends to pursue this option, tobacco share prices will plummet.  BAT and Imperial are already down over the last 6 months.  Maybe the time has come for LA pension funds to pull out of tobacco, as this proposal now presents a significant risk to the future value of tobacco stocks.



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