Is Woodford now boosting his exposure to tobacco?

The regulatory changes proposed for the tobacco industry have prompted Neil Woodford to become more bullish on Imperial Brands, the one tobacco stock he retained after recently selling out of British American Tobacco.

Woodford disposed of long-term holding BAT at over £50 per share in June to focus on the UK economy.

Last month the US Food and Drug Administration (FDA) proposed a new regulatory ‘roadmap’ to target the issue of addiction. However Woodford IM says this doesn’t undermine the case for Imperial Brands – which has grown its dividend by almost 10 per cent per annum over the past five years – and could even prove beneficial.

“We see this as the beginning of a process to deregulate next-generation products,” head of investment communications Mitchell Fraser-Jones says. “The company remains a highly cash generative business with a good track record of growing its dividend.”

Fraser-Jones adds that shares in Imperial Brands – which dropped more than 4 per cent on the day of the FDA announcement – “have not looked as attractive as they are currently, for several years”, suggesting Woodford may have been open to taking advantage of the falling share price. At the end of July, Imperial Brands was the third largest holding in the £9.3bn Equity Income fund at 5.8 per cent.

This was the case with Woodford’s top holding AstraZeneca, which suffered in June due to a failed drug trial, prompting Woodford to add to his position in AstraZeneca in recent weeks.

Fraser-Jones says: “Our investment case for AstraZeneca is not predicated on the outcome of one trial…its shares remained very attractive”. At the end of July AstraZeneca represented 8.15 per cent of the Equity Income fund.

Over the past month the fund has suffered an 8.1 per cent hit due to the share price weakness of several other holdings as well as AstraZeneca and Imperial Brands, including Provident Financial, AA, Theravance Biopharma and Prothena.

Mitchell-Webb says: “We remain convinced of the attractions of all [these] companies and believe that their share prices are sitting way below their fundamental value.

“The fund’s strategy remains intact and we believe will deliver very attractive returns as it becomes increasingly clear that the underlying performance of the UK economy is both robust and improving.”