UK Edition
Britain's biggest pension will no longer invest in tobacco – should investors follow suit?
British biggest pension has announced it will no longer invest in tobacco and sees no benefit of investing in a struggling industry that is being regulated to death.
The £6bn Nest pension fund – the largest pension master trust in the country, which is forecast to manage pensions on behalf of one third of the working population in the next decade – has said it will be selling off its remaining £40m of tobacco-related holdings, saying they are a poor investment for its eight million members.
The announcement comes as the Government is putting increasing pressure on pension fund trustees to think about the environmental and ethical impact of long-term pension investments.
Nest’s Mark Fawcett said: “Tobacco companies are facing legal challenges across the world from governments taking action against an industry causing serious harm to their citizens.
"The harsher regulatory environment stops tobacco companies from attracting new customers and increasing their market share of existing smokers. In our opinion, tobacco is a struggling industry which is being regulated out of existence.
"We have not taken this decision lightly but we don’t think it makes sense to continue investing in an industry whose business model looks increasingly unsustainable.”
For the best part of three decades tobacco firms in the UK have ranked among the top performing stocks of the FTSE 100, proving especially popular with income investors for their consistent dividends.
Over recent years however, the shares have fallen in price as investors expressed uncertainty over their future.
So what is the investment case for tobacco now, and should retail investors be worried about Nest’s recent decision?
The case for buying tobacco stocks
Matthew Tillet, of asset managers Allianz Global Investors, said the tobacco sector has undergone a “savage derating over the past three years”, but that brands like British American Tobacco (BAT) and Imperial were still worth buying for at least the next decade.
“The pricing power these firms have allows them to continue to generate profits and there is no sign that is about to radically change – so we think they are still a good bet for income investors, although there are obviously regulatory and other risks.
“However, we think these will play out over a very long time frame,” he said.
He added that both businesses generated a lot of cash and were in a good position to continue to payout high-yielding dividends to their investors.
Imperial currently pays 31.28p a share while BAT pays 50.75p.
The case against buying tobacco stocks
Ketan Patel of EdenTree, an ethically-focused investment group, said investors would be attracted by the payouts, but suggested investors looked to other stocks.
“While tobacco stocks might look cheap to some at the moment, thanks to Brexit, there is a whole host of ‘cheap’ shares currently on the market that do not carry the same risks inherent in tobacco,” he said.
“Why would you take a risk on a dividend that could be hammered by regulation?”
He argued fellow FTSE 100 firms, especially in the healthcare sector, such as GlaxoSmithKline (GSK), offered similar payouts with less risk and greater potential for dividend growth.
Telegraph Money recently reported on growing concerns that a number of FTSE 100 dividend-payers could be forced to cut the payouts, following announcements from telecoms giant Vodafone, as well as Royal Mail, that investors’ incomes would be sacrificed to plug holes and provide reinvestment for the businesses.
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