UK equity managers have played down fears the tobacco industry may be set for a wave of lawsuits after a Canadian court ordered British American Tobacco (BAT) to stump up £5.5bn in damages.
The ruling, from the Quebec Superior Court last week, was the culmination of a decade-long class-action lawsuit brought by two groups of smokers pushing for compensation.
BAT’s Canadian subsidiary, as well as subsidiaries from Philip Morris and Japan Tobacco, were ordered to pay out damages, raising concerns that other groups from around the world could bring similar class-action lawsuits.
BAT, along with its main rival Imperial Tobacco and overseas tobacco companies, is a stalwart holding for UK equity fund managers looking to generate a decent yield, with research from Hargreaves Lansdown showing the stock is held in two out of every three UK equity income funds.
Neil Woodford’s Woodford Equity Income fund has more than 15 per cent of its assets invested in the sector, with BAT, Imperial Tobacco and Reynolds American all among the fund’s top-10 holdings.
But the fund’s managers have played down fears over the tobacco sector, saying it has weathered such storms in the past.
Stephen Lamacraft, fund manager at Woodford Investment Management, said: “Litigation risk has been an enduring feature of the tobacco industry for decades and we do keep a close eye on developments.
“However, tobacco stocks remain a core part of the CF Woodford Equity Income portfolio and we don’t expect the latest class action to impact their attractive long-term investment prospects.”
Julian Chillingworth, chief investment officer at Rathbones and manager of the firm’s Blue Chip Income & Growth fund, said for long-term investors in the tobacco sector, the latest news “will come as no surprise”.
“The fine is not the first and it certainly won’t be the last,” he said. “As an investor, you have to go into this sector with your eyes wide open.”
Mr Chillingworth is not currently invested in BAT but has Imperial Tobacco as one of his top-10 holdings, preferring its current strategy of cost-cutting and acquisitions. However, he did not think the Canadian lawsuit heralded headwinds to come across the tobacco sector
“Have we lost conviction in the industry? No. Its income attractions lie in its strong cashflow generation.”
The share price of both BAT and Imperial Tobacco fell following the announcement of damages, but only by a small percentage.
Laith Khalaf, senior analyst at Hargreaves Lansdown, said: “The fairly muted market reaction suggests most investors don’t expect British American Tobacco to actually have to stump up the cash, or at least think the appeals process will kick the can into the very long grass.”
But if BAT lost its appeal, he said it would “set a precedent for court cases across the globe against the tobacco industry”.
Mr Khalaf added that while tobacco companies had become an income staple due to an ability to weather fines and litigation, he warned: “If the legal tide has turned, that ability may be called into question.”