The British American Tobacco (LSE: BATS) share price and its FTSE 100 peer, Imperial Tobacco (LSE: IMB), have slumped in early deals today. At the time of writing, shares in these two tobacco giants are trading around 6% lower on the day.
Over the past 12 months, British American has returned 6.2%, including dividends. Shares in Imperial have returned just under 10%, including income.
It seems to me that the market has been spooked by reports from the US that the new Joe Biden-led administration is planning to restrict nicotine levels in cigarettes.
New restrictions
At this point, neither the White House nor the US Food and Drug Administration, which regulates tobacco, have commented on the report. As such, there’s no guarantee such a restriction will take place, or even if it’s being considered.
Still, this highlights one of the most significant risks tobacco companies face. The possibilities of more regulations and restrictions are just a fact of life for these businesses.
Nicotine makes smoking more addictive. Reducing the level of nicotine in cigarettes could have an impact on the overall demand for the product. This would clearly affect sales at Imperial and British American.
But does this justify the recent decline in the British American Tobacco share price? It’s difficult to tell at this stage.
However, both of the tobacco giants have faced similar headwinds in the past. So far, they’ve been able to take all of these challenges in their stride. But the number of smokers worldwide is in steady decline, and so is the total volume of cigarettes sold.
British American Tobacco share price outlook
Despite these challenges, profits at British American have increased from £4.3bn in 2015 to £6.4bn for 2020. Meanwhile, City analysts believe Imperial will earn £2.3bn in 2021, compared to 2015’s income of £1.7bn.
Considering this performance, I think the sell-off of the British American Tobacco share price has been overdone. Granted, if the US administration introduces nicotine restrictions, demand for cigarettes could decline.
But cigarettes sales have been declining for years, and despite these challenges, both Imperial and British American have still grown sales and profits.
These investments may not be suitable for all investors due to the ethical considerations. That’s perfectly understandable. What’s more, I think it’s likely regulators will place more restrictions on these businesses as we advance.
Still, I’m encouraged by their past performance. I also think they look attractive as income investments. The British American Tobacco share price currently supports a dividend yield of 7.6%. Imperial yields nearly 9%. Of course, these dividends yields aren’t guaranteed. Both companies may have to cut their distributions if profits come under pressure.
Even after taking these risks and challenges into account, I’d buy both companies for my portfolio today as income investments.
