I have bet that shares in blue-chip favourite British American Tobacco plc (LON:BATS) will fall. Here is why.
British American Tobacco (LSE: BATS) (NYSE: BTI.US) is one of the most popular UK-listed companies. With a market capitalisation of £66bn, this cigarette manufacturer is the eighth biggest company in the FTSE 100.
BATS recently reported an 8% rise in adjusted profits and a 7% dividend increase. With a collection of brands and an army of customers frequently loyal to their dying breath, BATS is also one of the very most successful listed companies.
So why am I betting that the shares will fall? There are three main reasons.
1) Declining sales
According to data from TobaccoAtlas.org, between 1950 and 1990, global annual cigarette consumption grew by an average of 48% every 10 years. Between 2000 and 2009, the growth in annual consumption was just 3%.
With its recent final results, BATS reported a 1.6% drop in cigarette sales versus the previous year. Rival Imperial Tobacco's last trading statement reported a 1% decline in the number of cigarettes sold.
Bulls will suggest that growth in emerging markets will save BATS. I disagree -- awareness of the risk of smoking is prevalent and easily disseminated. New smokers will be much harder to win over than previously.
Tobacco's golden years are over.
2) Stretched share price
I believe that there are hundreds of better bets than BATS.
Although BATS has a great dividend history, our analysts here at The Motley Fool don't regard the company as the best income play on the market. That honour goes to the share they've written about in the free report "The Motley Fool's Top Income Share For 2013". Just click here to get the lowdown.
BATS trades on a 2013 price-to-earnings (P/E) ratio of 15.1 times expected earnings. The average P/E for a FTSE 100 share is 15.9. The trouble is, BATS' long-term prospects are much worse...
3) Hostile regulation
Governments are legislating for increasingly prescriptive tobacco regulations. Australia introduced plain pack rules in December. New Zealand will follow. The same ban is expected to be announced for the UK. In parts of Canada, it is illegal to smoke in a car with a child. The Chilean government has (as of today) enacted a ban on smoking in enclosed areas such as pubs and restaurants. Russia is banning smoking in the workplace later this year.
In all four corners of the world, it will be more difficult in future for tobacco companies to promote their goods or for people to buy and smoke cigarettes.
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> David has bet that the price of British American Tobacco shares will fall. He does not own shares or have any other bets on any of the companies mentioned.