THE INVESTMENT COLUMN: Smoking ban drags on Imperial Tobacco shares

WHILE THE millions who smoke Regal, Embassy or John Player cigarettes may not reap much in the way of health benefits from their manufacturer, Imperial Tobacco, shareholders in the company were yesterday told they are to be rewarded for their investment.

Having hooked customers means tobacco companies rake in cash. In Imperial's case, this is six times as much as it needs to cover its interest bill, so it plans to buy back pounds 450m of its own shares. Only pounds 200m will be spent this year, though - a hint that an acquisition may still on the cards. This is likely to be a smaller takeover, perhaps a cigarette paper business, or a loose tobacco company, rather than a seriously earnings-boosting deal. Shame. One of the few ways for a cigarette company to keep growing is through buying another one, but with tobacco stocks looking quite expensive, acquisition bargains have been scarce.

Since Imperial will cancel the shares it buys back, it will push up earnings per share by more than 2 per cent, and this will certainly prop up the share price. But it won't be enough to propel it to new highs.

Smoking bans are gathering momentum in Europe, and although the ban in the UK (only in pubs with food) is less severe than had been anticipated, it is yet another blow. Further tax rises in Germany, Imperial's second market after the UK, will also hit volumes, and risky price increases will be the only way it can sustain profitability.

Without an acquisition or a breakthrough in emerging markets such as Eastern Europe or China, the company could be running out of air. Given its dividend is less than 4 per cent, the shares should be avoided.