The Week In Review: US lawsuit casts long shadow over cigarette industry
Saturday 30 October 2004
Shares in British American Tobacco, the cigarette manufacturer behind the Pall Mall, Lucky Strike and Dunhill brands, have lit up investors' portfolios since the turn of the millennium.
Shares in British American Tobacco, the cigarette manufacturer behind the Pall Mall, Lucky Strike and Dunhill brands, have lit up investors' portfolios since the turn of the millennium. If you bought shares then, you have made a capital gain of 132 per cent and harvested another 42 per cent in dividends. Not bad for an industry in terminal decline.
Because its customers are all addicted, there is a predictable amount of cash coming in to fund those chunky dividends, plus vital acquisitions. These deals are about expansion in the Far East or Africa, and about cost savings closer to home. The question is always whether these can offset the financial pain caused as the developed world slowly kicks the smoking habit. So far yes. Strip out the effects of sterling's strength, and operating profit growth this year is 7 per cent.
Trading in Canada is the latest nightmare spot: a jump in excise duty has pushed people to lower-cost cigarette brands. Russia, though, is a growth area, as the locals trade up to posh Western brands.
BAT's newly merged US operations, in which it keeps a 42 per cent stake, are subject to the Justice Department's $280bn (£153bn) lawsuit against the industry, the darkest cloud hanging over BAT. But the 5.2 per cent dividend yield should help you sleep. Hold.
FIRST CHOICE HOLIDAYS
First Choice Holidays should be the first choice for investors looking to put a bit of money into the leisure sector. The company has flown through the turbulence in global travel markets since the advent of the terrorist threat, and profits are climbing steeply again. The pilot, chief executive Peter Long, set a course that has taken First Choice away from dependence on the traditional sun, sea and sangria family holiday and into more niche areas. It has increased its offering to long-haul destinations, pushed into specialist holidays such as cruises and established a reputation in adventure holidays.
Braemar is a shipping broker, responsible for arranging cargo and container ships for customers who need to haul raw materials and manufactured goods around the world. Despite stock market fears that a rising oil price could tip the economy back into the doldrums, trading across a wide range of industries is buoyant. Braemar said that demand for ships was still so high that freight rates in the crude oil and bulk freight markets were rising again, and more shipping firms were buying additional vessels. Keep buying.
Disappointing figures from Alterian, the technology company whose software helps marketing departments come up with better customer offers. The BBC, Vodafone and Royal & SunAlliance are among the users of its products, but sales have been shy of forecasts. Existing shareholders should look through the new uncertainty. The company has an impressive product which is getting a foothold in the US market now, too. Hold.
ST JAMES'S PLACE CAPITAL
With a new Government cap on the size of a pension pot, the rich are going to need to take more advice on how to best vest their retirement savings. And all the while, recovering equity markets are restoring confidence in saving. St James's Place Capital, which provides advice and financial products for the wealthy, looks in good shape to survive the wider industry shake-up. The shares are a solid play for the longer-term investor. Buy.
Exel is in the business of supply chain management, by which it means making sure that customers such as Marks & Spencer get supplied with all the goods they need at the time they want them - transporting, warehousing and tracking the produce on the customer's behalf. It is a business crucially dependent on global trade, which is strong, although the company has struggled to pass on the rising cost of fuel to its customers. The shares have a dividend yield of 3.7 per cent, suggesting they are fairly priced.
Hitachi Capital has been making the most out of debt-crazy Britain over the past two years, luring in ever more consumers with its "buy now, pay later" deals, which it provides for retailers such as DFS Furniture. There must be an end to the debt boom, but Hitachi believes it can continue its stellar growth rate. There are hundreds of retail industries it can break into, from caravans to health care to home improvement. Buy.
We have nearly crossed the desert, says Jean-Pierre Garnier. The chief executive of GlaxoSmithKline, the UK's biggest drug maker, means that a period with few new drug launches is about to come to an end. Profits have been withered by the collapse of sales of two antidepressants and an antibiotic, all of which lost patent protection within 18 months. The next generation of drugs to replace them failed to arrive in time. But there are now signs of green in the middle-distance.
In particular, a vaccine against the viruses that cause most cervical cancers, which was previously expected to go before US regulators for approval in 2008, is now going to be ready in 2006. Further out, there are potential blockbuster drugs for rhinitis and other cancers. The downside, after years of underperformance by GSK shares, is limited, and the stock yields a 3.6 per cent dividend. Buy.
Amvescap's customers are deserting. The fund management group is finding it very difficult to reverse outflows of money from its US funds. Don't let it blame the phenomenon entirely on its reputation-trashing run in with Eliot Spitzer, the New York state attorney-general over the market timing abuse scandal. Amvescap's fund managers have simply not been as good at generating returns for their clients as most rivals. Investors who have followed our poor advice to buy over the past year should hold on to see whether the business can be turned around, and in case of a bid. Outsiders should stay on the outside for a while yet.
Will advertisers skip ITV?
While ITV has been having a jolly old time thanks to the regulators, who continue to bestow huge benefits to the commercial broadcaster, a huge pitfall lurks on the horizon.
The danger is the growth of a device called a Personal Video Recorder or PVR. ITV is funded by advertising. A PVR allows viewers to fast forward the ads altogether. So with fewer eyeballs looking at the latest soap powder or margarine promotion, surely advertisers will start to look for other ways to sell their messages to consumers? Sky has aggressive targets to push its PVRs, which it aims to have in 2.5 million homes by 2010.
Investors are at last starting to become worried about the impact of PVRs, but they are far from being the only storm cloud on the horizon for ITV. The long-term trends were going against the broadcaster anyway. ITV has been losing audiences at a pretty alarming rate for the last 20 years as new terrestrial broadcasters (Channel 4, more recently Five) have come on the scene and multi-channel television arrived from cable, satellite and now digital terrestrial.
ITV will continue to grow profits sharply over the next few years, from a short-term ad recovery and the much easier regulatory environment it has skillfully negotiated. There will also be disposals of non-core businesses that might trigger returns of cash to shareholders.
The big picture, though, is that revenue growth will be much harder. Given the accumulating negatives, long-term investors should avoid putting ITV into their share portfolios.
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