Based on this calculation, RBC Capital Markets has upgraded its ratings to ‘outperform’ from ‘sector perform’ for both cigarette makers.
The analysts acknowledged that they were by no means the first to estimate how many years it would take tobacco companies' free cash flow to cover their market capitalisations.
What makes it more than an academic discussion this time, they believe, is the “buyers' strike” by ESG-inspired investors.
“For it to make sense, the companies would have to be confident in the sustainability of their business models,” the analysts said.
Seeing little sign of sales losing momentum, driven by significant pricing power, the analysts incorporated concerns about profit margins with a new base case forecast for the coming decade.
“It is hard to see how the tobacco sector can extricate itself from investors’ ESG penalty box,” RBC’s analysts said.
“If institutional investors won’t buy the shares, the companies should use their plentiful free cash flow to do so instead.”
The pair’s share prices “make a mockery of the idea of yield support” even in 2020, the year of the dumped dividend, with consensus prospective dividend yield of more than 8% and 10% respectively and the shares trading at severe discounts to other consumer staples stocks and well below price targets of £32 for BAT and £19 for Imperial Brands.