Big Tobacco, like its customers, is taking a long time to die
Rather like their customers, the world’s cigarette-makers face an existential crisis. At least, that’s what we’re always being told. After all, a business whose product causes the early death of its customers might eventually run out of them, so there’s a perfectly reasonable business strategy in using the profits to diversify. Following this logic has led the maker of Marlboro cigarettes to try and buy a business that makes inhalers, and has precipitated a fine campaign of manufactured outrage (there’s a lot of it about nowadays).
Nowhere has this outrage been more manufactured than at the World Health Organisation, which is forever going on about the tobacco industry using its “economic power, lobbying and marketing machinery” to propagate sales of the evil weed. It fulminated that a partnership with a health company is just a typical smokescreen (as the WHO did not quite put it). This is, of course, the same organisation that tried to suppress the suggestion that the Covid virus escaped from a Chinese laboratory, a possibility that remains very much alive today.
The Marlboro Man, Philip Morris, has offered £1bn, or 150p a share for Vectura, gate-crashing the deal the company had agreed at £958m with private equity group Carlyle. Sensing hours of fun, the market quickly marked Vectura shares up past 150p (they were 120p before Carlyle’s approach). The Vectura board and shareholders may have to decide whether Big Tobacco is a worse evil than those beastly short-termists from private equity.
It’s a tough call, but is rather beside the point. Despite being demonised over decades, banned from inside spaces, and constantly harassed by the medical profession, smoking, like the customers, is taking a very long time to die. While this process is going on, the business is generating cash at a rate beyond the dreams of other industries. Philip Morris is using the money to diversify, but with tobacco shares at today’s rock-bottom valuations, there is a better way.
British American Tobacco shares yield 7.6 per cent on a dividend which is more likely to rise than fall. Each time the price shows a bit of strength, a few more shareholders take a deep breath and sell out, so the shares have gone nowhere for three years. The dividend is clearly wasted on them, diversification is expensive and risks tainting the reputation of any (healthcare) business BAT may buy, as Philip Morris may be about to find out. The solution is to stop paying dividends, and to use the cash to buy in and cancel the shares that fashionable funds do not want to be seen holding.
At today’s price, BAT could buy in the whole of its outstanding capital in less than a decade. I look forward to 2031 in my role as the last outside shareholder, and proud possessor of one of the world’s largest companies. I may even have to start smoking.
My subsidies good, yours bad
Spare a thought today, if you will, for Dave Vince, the founder of Ecotricity, which says all the juice it offers to its customers is green. Of course, neither you nor Dave can tell exactly where his electricity comes from, but he buys the equivalent amount that he sells from the output of windmills and solar panels. Both of these power sources are subsidised by all electricity users, although the suppliers do not generally spell out how much more we are all paying, for fear of scaring the green horses. In total, it’s about £10bn a year.
Now Vince is getting all worked up at the prospect of someone else getting a subsidy, this one for the next nuclear white elephant, sorry, power station. He told the Financial Times: “It’s bonkers we would all have to pay this subsidy for at least a decade of construction and not for power generated.” Well, yes, but man cannot live by wind and solar alone, and if we are going to flagellate ourselves to net zero by 2050, more nuclear capacity is essential.
The problem with nuclear is that the projects are vast, the risks substantial, and the technology is losing the race with health’n’safety demands. Even a guaranteed payment of twice today’s spot price for the output from Hinkley Point leaves the builders apprehensive about their risk. They are not keen to shoulder another one at Sizewell. Faux de mieaux, the UK government looks set to approve what is delicately called a “regulated asset base” model. Vince prefers to call it by its proper name, a mechanism that forces customers to pay long before they see any output.
In theory, the builders are liable for cost over-runs during construction, but if you believe that, you’ll believe that HS2 will cost less than £100bn. Of course, there is a simple way out of this problem. Abandon the arbitrary 2050 target, admit that fossil fuels have many more decades left, and hope that science and technology will eventually find a way to replace them. Too big a helping of humble pie needed there, obv.
Drop the Dutch, Ben
The beasts from the black stuff, those horrid polluters at Royal Dutch Shell, have decided to appeal the ruling stuck on them by a Dutch court in May. In a particularly impressive moment of judicial over-reach, Judge Larisa Alwin had decided that Shell’s target for cutting its CO2 emissions wasn’t good enough, and that the company had a “human rights obligation” to do more, so she imposed a stricter one.
The Dutch wing of Friends of the Earth, which has negligible economic interest in the company, had brought the action. Its response this week was to tell Shell to save the lawyers’ fees and get on with it. (I told you there was a lot of outrage about). The appeal makes sense as far as it goes, while CEO Ben van Beurden had already promised to try and save some more CO2.
He would be better employed working on a Unilever solution, to move Shell’s domicile to its logical home in the UK, leaving the Dutch subsidiary to try and comply with Alwin’s crowd-pleasing ruling if the appeal fails. It took a campaign and some revolting shareholders before Unilever saw sense. It also cost the (Dutch) CEO his job.