Up in smoke: Tobacco shares fall as investors panic over a possible menthol ban

Cigarette shares plummeted today as investors responded to reports that the US Food and Drug Administration (FDA) is planning to crack down on menthol cigarettes.

British American Tobacco (BAT) shares suffered the most, diving by nearly 10 per cent in early trading, while Imperial Brands saw shares fall four per cent. 

News about a potential menthol ban that could come into effect in two years' time surfaced in The Wall Street Journal on Friday, days after it was announced that the FDA was looking to ban certain flavoured vaping products. 

BAT investors now fear for the future of the group's menthol US brand, Newport, which it acquired when it bought RJ Reynolds last year for $49bn (£38,1bn). 

Steadily declining numbers of smokers paired with an increasingly hostile regulatory environment for tobacco products have troubled shareholders for some time now.

BAT shares have lost nearly 38 percent in value this year so far.

Michael Hewson, chief market analyst at CMC Markets UK, said: "Against that backdrop the company has warned that revenues from its smoking alternative products are likely to miss expectations for this year, due to a slowdown in Japan for vaping products.

"Despite this slowdown, revenue from vaping is still expected to rise by more than 10 per cent, however the company has warned that adverse currency shifts will hurt its full year numbers by about seven per cent, as management look to justify falling short of expectations. This seems a rather high number given how stable currencies have been the past few months."

“It must be emphasised that at this stage these reports are still rumours and they make it clear that it would take some time to draw up the ban and then implement it," added Ian Forrest, investment research analyst at The Share Centre.

He maintained his 'buy' recommendation for Imperial Brands, however.

"We do not anticipate the ban to impact as negatively as BAT, which is currently listed as a ‘hold’, but we have placed that under review.”

Nicholas Hyett, equity analyst at Hargreaves Lansdown, said: "Analysts reckon BAT generates some 20-25 per cent of group profits from US menthol, thanks to its Newport brand. The acquisition of Reynolds gave BAT a dominant position in US menthol. That’s a segment that’s been in regulators’ sights for some time – thanks to its perceived status as a gateway for new smokers. While many menthol smokers would likely move over to non-menthol products, it would still be a major blow."