Imperial
Tobacco has been fined £112 million by the consumer affairs
watchdog, the Office of Fair Trading, for colluding with retailers to
fix prices. We are maintaining our 2,211p fair value estimate because
the fine represents only around 5% of Imperial's UK annual revenue and
does not move the needle on our valuation.
The case related to promotional discounts that were offered to retailers
under the agreement that the discounts would be passed on to consumers.
Retailers such as Morrison
Supermarkets were also fined, but the OFT's case against Tesco
was dropped. Imperial will appeal, and although we think the firm does
have grounds for appeal, given that the consumer ultimately received
lower prices, the appeal could take years and, if unsuccessful, could
result in a higher financial penalty. This ruling is a reminder of the
litigation risk involved in investing in tobacco stocks, and we continue
to recommend that investors look to firms with the strongest brands and
highest yields, such as Philip
Morris International and Altria,
in order to maximise the return for bearing that risk.
Philip Gorham, CFA is a Morningstar equity analyst.
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