Big Tobacco has had an incredible run. Its products were always addictive and easy to manufacture. Over time, as the health risks of smoking became undeniable, governments across the world opted to clamp down and tightly regulate the industry rather than ban the products altogether.
The confluence of these factors made the tobacco industry one of the most concentrated and profitable industries on the planet. The aggregate profits for all major tobacco producers across the world exceeded US$62.27bn (£49.6bn) in 2015, the latest year with full records.
In 2016, the five largest producers shipped 2.27tn cigarettes, which equates to more than 300 units for every human alive at the time. One of those large producers is London-based British American Tobacco (LSE:BATS), which reported £9.3bn in operating income last year.
Like other Big Tobacco leaders, BAT has managed to avoid death and taxes to create profits. A steady decline in the number of smokers in the developed world has been offset by a growing number of new smokers in emerging markets, particularly Asia.
However, the industry understands that growth in the Asian market will eventually saturate like the rest of the world, which is why they have turned to a new source of potential growth – e-cigarettes, or vapes.
These vaping products, or ‘new category’ products as BAT likes to call them, accounted for more than £1.8bn in sales last year. The company cut 2,300 staff earlier this year and has initiated a restructuring to focus on this segment and to double the sales of vaping-related items by 2024.
Investors were so thrilled by the company injecting some fresh blood into its already lucrative business that they pushed the stock up by nearly a third earlier this year.
However, I believe it’s too early for this sort of optimism. Not much is known about the long-term health consequences of vaping, and this year we started to see signs that this innovative new category may not be the panacea tobacco investors were hoping for.
According to the Centers for Disease Control and Prevention (CDC), a new form of lung disease linked to the use of vaping products has already claimed eight lives and affected 530 people across the US. This week, Canada reported its first official case of vaping illness, when a teenager was put on life support. By Wednesday, the Indian government had announced a blanket ban on all vaping products across the country.
I wouldn’t be surprised if more cases and more bans emerged in the years ahead. Governments may be compelled to step in and nip this issue in the bud. That could mean BAT’s hopes of growth could be going up in smoke.
Nonetheless, BAT is far from being a doomed company or a bad investment, in my opinion. As I mentioned in my previous article, more than a billion people are still addicted to tobacco and could help cover the 7% dividend yield BAT currently offers, for decades to come.
Foolish takeaway
I believe BAT is still an excellent dividend stock for income-seeking investors. However, concerns about the health risks of e-cigarettes could be denting the company’s growth story.
