Could the e-cigarette break the sector's tobacco taboo?

It would be interesting if charities that historically have shunned tobacco now become engaged, writes John Hildebrand

John Hildebrand
John Hildebrand

It has been suggested that the 1990s dance band The Shamen first predicted the rise of the electronic cigarette - or e-cigarette - in 1992 with their hit song Eberneezer Goode ("Es are good, Es are good"). This, it is said, foretold a revolution in the tobacco sector.

More recently, the broker Canaccord has predicted that electronic cigarettes will be the most significant development in the history of the organised tobacco industry. The industry is in its infancy but, from 2016, it is likely to be regulated by the Medicines and Healthcare Products Regulatory Agency, because some e-cigarettes still contain nicotine. They do not need a health warning at present and are not subject to the same level of tax as regular cigarettes, but there are some restrictions on advertising.

A lucrative place to invest

Charities have often faced a problem with the tobacco industry. Cancer charities and hospices have always avoided it, but for other charities the issue is less clear-cut. Should they take money from tobacco companies and should they invest in them? Many charities will be aware that the tobacco sector can be a lucrative place to invest - it was the best sector for investment during the Great Depression of the 1930s.

In the five years to 30 June this year, the tobacco sector outperformed the FT All-Share index by 48 per cent. At the beginning of this period the sector accounted for 2.8 per cent of the UK share market - so those charities that avoided tobacco over this period might have underperformed by 1.4 per cent, although that would depend on where else they invested this money. By the end of the period the sector accounted for 4.6 per cent of the market, so a decision about whether or not to invest in tobacco is not insignificant.

Some charities might even take the view that encouraging smokers to switch from the old paper-based cigarettes to the newer electronic ones is something that they should be doing because it could lead to a healthier society.

If e-cigarettes were to replace the traditional variety, it would have a substantial effect on the exchequer. If the UK government ceased to receive excise duty from cigarettes, it could lose as much as £10bn in taxes, even assuming it still received the equivalent amount of VAT revenue from the sale of e-cigarettes. This is roughly equivalent to 2 per cent of all taxes collected in the UK.

However, there would obviously be considerable social and financial benefits from this turn of events. Fewer people might die from smoking-related diseases, and the NHS might make considerable savings from having to treat fewer cases of people suffering from such illnesses.

As with any new industry, the growth of the e-cigarette sector is hard to predict. But it would be interesting if charities that historically have shunned the tobacco industry become engaged, at some point in the future, in investing in e-cigarette manufacturers, seeing such an investment as one of the ways in which they can fulfil their long-term aims.

John Hildebrand is an investment manager at Investec Wealth & Investment

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