BAT addressed the now formal investigation in a statement to shareholders on Tuesday morning, stating that it had been co-operating with the SFO and “investigating, through external legal advisers, allegations of misconduct.”
The suspicious conduct was first brought to light on BBC’s Panorama programme, after a five-month long enquiry uncovered hundreds of documents that appeared to show BAT employees bribing politicians and other public officials.
Despite the SFO update, there weren’t any massive swings in BAT’s share price. In fact, its shares were trading up by 1.4% to £47.81 per share in the early afternoon, reflecting the staying power and potency of the tobacco industry.
However, when the Food and Drug Administration unveiled a new comprehensive plan to lower the nicotine content in traditional “combustible” cigarettes, shares in BAT fell 7%, costing the company billions of dollars shortly after it had purchased American tobacco firm Reynolds.
The British tobacco company is beloved by big names in the equity income space for its penetration in key emerging markets and its generous dividend, which was 169.4p in total for 2016.
Investec’s UK equity income manager Blake Hutchins, for one, called it “the best global tobacco business” in a recent interview with Portfolio Adviser.
But not everyone has been enamoured with BAT’s future prospects, with Neil Woodford famously dropping the stock from his flagship fund in June on valuation grounds.
For Liontrust macro strategy managers Jamie Clark and Stephen Bailey, the reason not to invest in big tobacco was a thematic, not a valuation call.
But after the recent SFO probe and warning shot from the FDA about nicotine level, finally, the “chicken has come home to roost.”
The alleged rule breaking in emerging markets is not something that is unique to BAT, Clark said, but “part of the way big tobacco seems to operate,” through coercion and manipulation.
“They are complicit in cajoling economies,” he said.
“It’s becoming more and more prevalent across the industries that deal in these emerging countries that this kind of behaviour is getting clamped down on,” said Seven Investment Management’s Ben Kumar.
“Industries that are going to be struggling anyway in developed markets for regulatory reasons or health reasons, they are going to be tempted to look to other markets and to bend the rules in those markets.”
Whether or not BAT is guilty of the alleged charges is beside the point, said Kumar. The more interesting takeaway is “the lengths dying industries are willing to go” to remain profitable and survive.
Head of private investment management at Thomas Miller Andrew Herberts does not think the SFO investigation will spell the ruination of BAT, however.
“Typically these investigations produce more smoke than light and I would not expect a lasting impact on the stock,” he said.
