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Excerpts from Questor Column: Risk-averse investors should kick the habit

THE DAILY TELEGRAPH(LONDON) [03/09/00]

TO be honest, the best way to make money out of a tobacco company at the moment is to file a lawsuit.

Thanks to the tidal wave of litigation engulfing the industry, shares in any one of the tobacco companies are a potential bomb. At the whim of the American justice system, your investment could vanish in a puff of smoke.

British American Tobacco (BAT) is no exception. The high-profile Engle litigation in America has unnerved investors and depressed the share price. The question that any potential buyer has to ask now is simple: are people being over-sensitive to the "Armageddon factor" built into this company?

On a first glance the evidence is compelling. The shares are simply very, very cheap. On analyst's forecasts of around pounds 2.3 billion profit before tax for 2000, the shares trade on five times future earnings. This is an absurd rating for a company which saw an 86pc increase in pre-tax profit last year.

Yesterday's full-year results were a mixed bag. Overall volume is down 9pc, but the company's merger with Rothman's has helped to grow the company's profits from pounds 738m to pounds 1.37 billion.

Whether the share price will revive is another matter. The company is launching its website, the cumbersomely named britishamericantobacco.com, at the end of the month. However, there will be no opportunities for e-commerce until proper safeguards can be put in place against underage smoking. So that throws the obvious share price cure out of the window. The company is also unlikely to start a share buyback programme in the very near future.

If you are looking at the dividend, you could do a lot worse than BAT's 10pc yield. However, as a growth stock, the company is unlikely to outperform in the short term.

Tobacco is not the fabulous opportunity it once was, and most investors could do without a Sword of Damocles hanging over their investments. Risk-averse investors should stub this one out.