Financial Mail - Investors Monthly
Smoke signals: BAT VS MTN
BAT shares have fallen sharply but this is such a rare event that it is still a tempting investment
The trouble is not that MTN has to pay a fine, but that it is simply unwilling to play by the rules
Biases are difficult things to shake. Recently I have become somewhat bearish regarding the prospects of a continued bull market.
Calling the top is one thing, but getting it right is another. So I am going to stop short of calling the end of the end of the bull market, but I will say that we have had a very long bull market from a historical perspective and that it would not come as a surprise if, some time within the next six to 18 months, the market enters a bear phase.
Global markets have come down significantly already and I don’t think it would take much more panic for them to slide another 10% or so.
So, to find shares worthy of investment during troubling times, I turn to noncyclical stocks to find “defensive” investments. British American Tobacco (BAT) might not seem like a logical pick considering that its shares have dropped 40% this year, the biggest decline in two decades. But if you consider that it has only had two annual declines in the past 19 years and that much of the reason for its underperformance this year is a changing regulatory landscape, it may seem that the short-term pressure is a little overdone.
Recently the stock was sold off on the back of news that regulators want to ban menthol cigarettes and flavoured vape oils, as they believe these “sweet flavours” are enticing teens to smoke. No doubt this will have a negative impact on BAT, but as we have seen in the past, rules change, yet people keep smoking. Also, one must wonder how long it will take large tobacco companies to recognise the potential of the newly legal marijuana industry.
If global stocks do end up entering a bear market, emerging market currencies will be sold off. BAT is dual-listed and thus should act as a decent rand hedge in the event of significant rand devaluation.
Buying a defensive stock at the lowest price it’s been in five years and at a dividend yield of 6.59% makes sense — at least within the context of trying to protect my portfolio from a potential bear-market scenario.
We’ve all come to know the woes of MTN rather well over the past few years. Primarily it is regulatory issues in Nigeria that have been plaguing it. I’m not sure if that is the right way to put it though. Rather, primarily it is its inability to follow regulations and policies that get it in trouble and end up costing it, and shareholders, a ton of money.
To recap round one in Nigeria: first MTN was fined for allowing users to make use of its network without complying with Rica laws and hence stood accused of aiding terrorism in this way (by inaction, or failing to implement Rica rules that it helped create).
At the time, it was fined $3.9bn, though after some negotiation and a commitment to list some shares on the Nigerian stock exchange, that fine was settled for less than half the original amount. You would think that MTN had learnt its lesson.
Round two, and this time Nigeria has fined MTN about $10.1bn for taking money (earnings) out of Nigeria without following the regulated and required processes as set out by the central bank. Once again, MTN has put on its negotiating hat and Nigeria might settle for around one seventh of the original amount. This is great news, you would think. The trouble is that the “sharp recovery” that this news started on the day it was released lasted only about an hour before the share trimmed back those gains.
In other words, the market was unconvinced.
The trouble is not that MTN has to pay a fine, but that it is simply unwilling to play by the rules. It insists that it has done nothing wrong, yet is willing to pay a settlement.
This sends a message of accepting guilt. Its insistence that it is not doing anything untoward seems hollow.
MTN is losing the trust of its shareholders, not by some major oversight that it has admitted to and won’t do again, but rather by a second major oversight in which, again, it is claiming innocence and yet again is opting to settle.
Combine that with a potential bear-market scenario in which emerging market currencies are sold off (and keep putting a drag on MTN’s earnings) and we have a recipe for a short position.