Investors don’t want to quit, even after smoking suit
Doubts over damages as shares barely stir
MONTREAL • Though Quebec has ruled that three tobacco giants will have to pay out more than $15 billion in what is believed to be the biggest class-action lawsuit Canada has ever seen, analysts say it hasn’t knocked the wind out of one of the world’s most profitable industries just yet.
“The damages usually get written down to a much small- er amount, so if the judgment remains in place and this is not the end of the road for the legal process then yes, it would be a significant negative,” said Philip Gorham, an analyst at Morningstar Inc. in Amsterdam.
“But I would expect to see that number come down. These lawsuits have been around for a long time and it’s nothing new.”
Superior Court Justice Brian Riordan’s decision was made public late Monday following years of testimony and another six months of deliberations.
The three firms will split the $15.6 billion according to responsibility set out by the court — 67 per cent will fall to Imperial Tobacco Group
PLC ($10.5 billion), 20 per cent to Rothmans, Benson & Hedges Inc. ($3.1 billion) and 13 per cent to JTI-Macdonald ($2 billion).
Two of the firms — JTI-Macdonald and Imperial Tobacco — reacted immediately to Riordan’s ruling and said they’ll appeal the decision.
The plaintiffs included just over one million Quebecers who argued the companies were liable because they knew they were putting out a harmful product and hid the health effects of tobacco.
On Tuesday, shares of Imperial Tobacco’s parent company, British American Tobacco PLC, fell 2.4 per cent in London. Japan Tobacco Inc., the parent of JTI-Macdonald, saw its stock slip 1.8 per cent in Tokyo.
Gorham says this relatively small drop indicates investors are confident that the final payout will probably come down later in the appeals process.
“Just as tobacco companies claimed in this case that people should have known that smoking causes cancer, investors in tobacco need to know and understand there are certain fat-tail risks involved in holding tobacco stocks,” he said.
All Canadian provinces have filed medical cost recovery lawsuits against tobacco companies for health-care costs stemming from smoking-related disease and are seeking about $120 billion collectively.
“It is fair to say that Canada is probably the global ‘ hotspot’ for tobacco litigation so it will be interesting to see how this and other cases there develop,” said James Bushnell, an analyst at Exane BNP Paribas in London, in an email to the Financial Post.
In Canada, some major institutional investors hold shares in the tobacco sector.
The Caisse de dépôt et placement du Québec and BMO both hold shares in Japan Tobacco, according to Bloomberg data. The Canada Pension Plan Investment Board and RBC hold shares in Altria Group Inc. and Philip Morris International Inc., two tobacco companies not involved in the Quebec lawsuit.
CPPIB says it holds tobacco stocks in passive portfolios that match indexes.
“We have no control over the universe of stocks contained in those indexes and screening out assets is inconsistent with our legislation,” said Mei Mavin, a spokeswoman for the pension fund.
NEI Investments is one firm offering ethical funds that has not invested in tobacco companies throughout its 30-year history.
“We need to be able to visualize the company being run in a sustainable, responsible fashion and we can’t do that visualization for a tobacco company because of the fundamental nature of the product,” said Michelle de Cordova, director of corporate engagement at NEI. “More recently, we have also been concerned about the possibility of this kind of litigation risk for the tobacco sector. We were aware of the cases — and the possibility that these cases might start to hit home at the companies.”
There are still a large number of cases in North America against tobacco companies, with the plaintiffs winning about half the time.
“Such cases tend to take several years to resolve, and given that the tobacco industry has been successful in challenging class action cases in other countries (then) it is far from a given that these damages will stick,” Bushnell said.
Despite the landmark ruling, Gorham says the legal environment in North America is actually improving for tobacco companies.
“Slowly but surely they’re working their way through these outstanding cases and it’s harder to bring new cases to court because we’ve known for 50 years that smoking causes cancer,” he said. “Tobacco will lose a lot of cases, but they’ll also close some down and they’ll win some as well.”
Gorham says that despite declining profits in recent years, tobacco still makes “outstanding” 35 per cent EBIT margins.
“It’s the best on an industry basis across the consumer staples sector,” he said.