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Donald Trump has threatened to ban vape cigarettes at the same time as London-listed British American Tobacco announced over 2,000 job cuts as it shifts its business towards alternative-tobacco products.

The juxtaposition of finding new sales amid tighter rules has hampered tobacco stocks and their investors – so is now the time to make a change? British American Tobacco and its London-listed rival Imperial Brands have been mainstay investments for fund managers and private investors alike. he duo have driven returns for the likes of Neil Woodford but more recent performance – much like the fund manager – has left a lot to be desired. 

Dwindling cigarette consumption, greater focus on health policy and the increasing amount of ethics-based investing has meant investors have ditched the stocks in their droves. Imperial Brands' and British American's share prices have fallen 32pc and 26pc respectively as the FTSE All Share index – a broad measure of the London stock market – has risen 23pc. Both have turned towards alternative cigarettes to help drive new business and have focused on "e-cigarettes" rather than "vape-cigarettes".

E-cigarettes are targeted at former smokers while their vape equivalent has found a place among the younger population, many of who never smoked traditional cigarettes, according to NHS data. The difference between the two products may seem nuanced but it is fundamental to the investment case for both companies, according to Charles Somers of asset manager Schroders. He said: "Vape products have not been through the required safety process, but will soon be forced to and many are unlikely to reach the standards but e-cigarette products have a properly documented safety profile." Although the growth may take time to come through – at present companies investing in e-cigarettes appear in a better position than their vape rivals.

In its latest results, British American Tobacco reported cigarette sales were down 3.5pc.

Its loss-making alternative cigarette division also struggled but it promised more investment in the area and announced thousands of job cuts to manage this restructure. The investment case remains heavily reliant on dividends. Both generate huge amounts of cash and given the share price falls offer attractive yields: 6.7pc for British American and 8.6pc for Imperial Brands. However, Alan Custis at Lazard Asset Management, said investors should be wary and the sustainability of dividends should be “called into question”.

He added: "Contrary to traditional cigarettes, e-cigarettes and vape products have lower barriers to entry, little product differentiation, limited tax structures supporting pricing and as yet unproven health claims. 

"With the traditional business declining faster and considerable questions over the future growth element of the industry, this is an industry under considerable difficulty."

Both London-listed tobacco stocks are cheap relative to the FTSE All Share average and other tobacco rivals. British American is currently valued at 9x its future earnings and Imperial Brands 7.8x. American rivals Altria and Philip Morris are valued at 10.2x and 14x respectively. Mark Barnett of fund house Invesco Perpetual – who owns both stocks either individually or together in a number of his portfolios – said the stocks were simply too cheap not to own. In a note to investors in May, he said despite the concerns about regulation, growth and disruption, the stocks were “significantly undervalued”.

Mr Barnett said: “To my mind, these threats are overplayed, and current share price valuations offer too bleak an outlook of the industry’s future." With such high dividends, investors are arguably being rewarded for taking on this business risks. Mr Trump threat also meant companies able spend on research and development – like the London listed giants – stay ahead of regulations and come out on top.

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