Hardly anyone today can imagine how ubiquitous smoking still was in the 1960s.

Not only were cafes and restaurants fogged with tobacco fumes, even planes, a means of transport for the wealthy only, had ashtrays for every passenger. Our celluloid heroes were all smoking, from Steve McQueen to Brigitte Bardot. Our parents were smokers and so were our teachers. Cars had no safety belts then, but cigarette butts everywhere.

Today, at least in the developed world, smoking is in fast decline. Offices, restaurants and even public spaces are non-smoking zones. Smoking ads in cinemas are forbidden. Film stars only smoke to emphasise that they are baddies. In many countries, under-age-smoking is illegal. Packaging becomes ungainly or unappealing by the display of horrific, smoking-related illnesses and oversized health warnings. Ever fewer smokers find ever fewer places to nurture their addiction.

In the 1960s, 42 per cent of US Americans were smokers. This percentage has fallen to less than 14 per cent today, a decline which will further accelerate. In the very near future, smoking might be eradicated like polio, it seems. It is in rapid retreat not only in the US, which was fighting tobacco with puritanical zeal, but everywhere in the developed world.

With so dramatic a meltdown in sales, Big Tobacco, harassed by never-ending lawsuits in the US and vilified by ethical investors, looks like a business very much past its prime. Yet, while smokers in the West are dropping in numbers, consumption in developing countries in Africa and South-East Asia is still growing.

The development of “non-combustible” cigarettes based on vapour or heated tobacco seems to offer a life-line, despite recent health alarms. Falling sales in old markets were compensated for by ever higher margins: selling less, BT managed to earn even more. Dividend payments were high and steady, share-buy-backs standard.

Yet, in the last two years, the shares of the biggest players – Philip Morris International, British American Tobacco, Imperial Brands, Altria and Japan Tobacco – with combined sales of more than $800 billion – have lost almost 50 per cent of their value. Is this a sign of worse to come or a buying opportunity?

Statistics are difficult to verify, but according to the Tobacco Atlas (American Cancer Society), globally, 1,083 cigarettes are consumed per person per year. The scoreboard is puzzling. The heaviest smokers are apparently found in Andorra (6,398 cigarettes per person), Luxembourg, Belarus, North Macedonia and Belgium. Almost nobody seems to smoke in North Korea, which is either a sign of unbelievable poverty or statistical whitewash, or a combination of both. And absolutely nobody smokes in Brunei apparently (9.7 cigarettes per annum).

In many countries, it is men who smoke more than women. In China – the biggest tobacco producer in the world (2.3 million tons) and also the biggest consumer of tobacco – 70 per cent of all men are smokers but only eight per cent of women smoke.

We Maltese still smoke more heavily than the world-wide average. We consume 1,527 fags per person, which translates into 7,635 per smoker (20 per cent of the population), or one pack a day. Seems like a hell of a lot of chain-smoking, if the statistics can be trusted. Again, it is men who smoke more than women.

We Maltese still smoke more heavily than the world-wide average

It is the poor who tend to smoke more, poor countries and the poor in each country. There are more people smoking in Kentucky than in California. With the world population still growing for decades to come, the future of BT depends on how effectively international trade can lift poor countries into middle-income countries. The wealthier a country, the less its populace will smoke.

Shedding poverty, such countries will be concerned about healthcare too, and the costs which come with broader availability of medical treatment. A country concerned with public services and balanced budgets will fight smoking more actively. Only with global poverty increasing in tandem with population growth can BT boost sales.

Last month a possible merger of Philip Morris International (PMI) and Altria was announced, which would have created a behemoth worth €200 billion. Both produce and sell Marlboro, the world’s best-selling cigarette – Altria in the US and PMI in the rest of the world.

PMI was created in 2008 to ring-fence US litigation risks within Altria. What had motivated the merger talks was the optimistic belief that the tsunami of law suits was already abating, as well as Altria’s recent $12.8 billion investment into Juul, the market leader of vapour-based e-cigarettes.

Vaping, considered “95 per cent less harmful” than conventional smoking, seemed to promise a litigation-free and regulator-friendly addiction product. Until people started to die from misuse and governments realised that people who had never smoked before or had quit smoking already were hooked on it. Within a short period of time, flavoured vaping was banned in many US states and countries like India had clamped down on “juuling” completely. Juul transformed from darling to toxic.

For PMI investors, the mooted merger had never made much sense. PMI, worth $120 billion, or 50 per cent more than Altria, is operating globally, unhampered by regulation in a single country. It sells in 180 countries, increasingly in the growth markets of Africa and Asia. It has developed a smokeless alternative, “IQOS” (“I quit original smoking”), where tobacco is heated to release its original flavour and nicotine fumes, in difference to vaping, were flavoured nicotine salts are vaporised.

Shares trade at $75.14, down from $122 in 2017. With a P/E of 14, they are more expensive than Altria’s (P/E 9.9), BAT (P/E 11), Imperial Brands (P/E 10.8), or Japan Tobacco’s (P/E 10.65). PMI’s dividend yield of 6.23 per cent is lower than its peers too and lower than Altria’s (8.37 per cent), yet still impressive when compared to the S&P 500 average of less than two per cent for all big US companies combined. PMI is a single play on tobacco – other than Altria which has, besides Juul, a stake in cannabis producer Cronos and is a large shareholder of the world’s biggest beer brewer Anheuser-Busch InBev.

The question whether to invest as a retail investor in BT is firstly a moral one. Not everyone is cynical enough to earn money from the hazardous addiction of others. This is why many pension funds will exclude BT from their portfolio. By taxing smokers heavily, most governments prove to be less squeamish.

Being a smoker myself and feeling increasingly handicapped in my personal freedom and my freedom of choice, I look at tobacco investments as a form of defiance.

But are BT investments profitable? From a dividend-standpoint, tobacco shares are certainly more attractive than bank deposits. Tobacco stocks, and the big five are all very similar in this respect, do not promise explosive business in the future. They are the opposite of growth stocks, administering a secular decline with skill. They regularly pay high dividends, more than most other companies.

This is, in times of disappearing bond incomes, a positive thing. Hoping for share price gains would be a stretch too far. Shares will bob up and down, mostly down. BT is out of fashion. And it does not look like it will be back in fashion within the next few centuries. This is why e-cigarettes looked like a second lease of life: the same old addiction made less harmful.

How this will play out, nobody can safely predict. Perhaps Altria will rejoice one day having overpaid for Juul. The risk is that it is politically riskless to come down on e-cigarettes with harsh regulation. Too few voters are smokers these days. Not even Trump, who must realise that most of his angry white men are smokers and who wholeheartedly embraces coal, will think it worthwhile to support BT.

The biggest risk though is not regulation, but Big Tobacco itself, suffocating the business by increasingly overpricing its product. Most smokers are poor, after all.

Andreas Weitzer is an independent journalist based in Malta. He reports on the economy, politics and finance. The purpose of his column is to broaden readers’ general financial knowledge and it should not be interpreted as presenting investment advice or advice on the buying and selling of financial products.

andreas.weitzer@timesofmalta.com

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