Top 12 tobacco stocks to watch

Tobacco industry overview

Over five trillion cigarettes are smoked globally every year and the global tobacco market is estimated to be worth over $900 billion annually. Just four of the largest players – Philip Morris, British American Tobacco (BAT), Altria Group and Imperial Brands – boast a combined market value of over $370 billion – three times larger than their annual revenue last year $128 billion and over 11 times greater than their combined profits of $34 billion.

The fact valuations are trading at far greater levels than income suggests investors believe Big Tobacco has a long-term future - despite growing consumer awareness about the health implications of smoking, tougher regulations and higher taxes. This is in part because there are still plenty of countries where smoking levels are still rising, but also because new products like vape devices have allowed them to revitalise stagnate markets in developed nations where smoking has been on an overall decline.

Tobacco stocks: emerging over developed markets

As stricter legislation has been imposed and cigarettes have become relatively more expensive in most developed western nations, the tobacco industry gradually shifted its focus to emerging markets where regulation is more lax, and where smoking rates are still climbing due to booming populations with growing incomes. For example, figures from Statista shows, despite the apparent domination of US and European-based stocks, that China National Tobacco Corp controlled a staggering 43% of the global cigarette market in 2017, compared to the tiny slice of the pie held by the likes of Philip Morris International with 14%, British American Tobacco (BAT) with 12% and Imperial Brands with 4%. China accounts for over 40% of all cigarette sales worldwide in terms of total volume, partly down to its huge population. However, Eastern Europe is also a key market hub for the industry. In terms of the average amount of cigarettes the average smoker has each year, eight of the top ten countries worldwide are in Europe.

The fact China National Tobacco is owned by the government and not only manufactures cigarettes but also regulates the industry is evidence of the difference in attitudes between the east and west. It also demonstrates the importance of income derived from taxing tobacco sales to national governments. In the UK, for example, tobacco duty receipts brought in a record £9.7 billion worth of revenue to the government in the 2013 tax year, but has been in decline since.

Interestingly, while the number of people smoking in developed nations like the UK are largely in decline the value of the market has proven far more resilient because of the significant increases in price: a pack of 20 cigarettes in the UK has rocketed from less than £5 in 2005 to £10 today to make it the most expensive country to buy cigarettes in the whole of Europe – Ireland is the only other country in the bloc that charges more than £6 a packet with the average price in Bulgaria less than £3. While hiking prices is supposed to deter people from smoking and encourage existing addicts to quit, it does also give both the tobacco industry and the government purse an opportunity to offset declining smoker numbers with higher prices and taxes.

Tobacco stocks: vaping and cannabis

Although the tobacco industry has proven to be consistently profitable its long-term future has been under constant threat. As the overall number of smokers globally began to decline many believed it was the beginning of the - albeit very prolonged - end. But the tobacco industry is a survivor and has rapidly taken advantage of the new opportunities in vaping, other ‘next-generation products’ and, more recently, cannabis.

Read more on whether the evolving e-cigarette policies will help or hinder vape stocks

According to British American Tobacco (BAT), the vapour and tobacco-heating products market is worth around $18 billion at present while Grand View Research estimates the legal marijuana market is already valued at over $10 billion. Both are forecast to experience huge growth in the period running to 2025.

Virtually all companies with mass exposure to the tobacco market have made moves toward these new areas that aren’t as restricted by regulation and where they can pursue growth that they haven’t seen from their traditional businesses for decades. Much like they did with tobacco, the industry is aiming to sculpt how these new markets are managed, which is easier due to a lack of global agreement. For example, vaping devices have emerged in the UK exclusively as smoking cessation devices whereas new brands in the US are being marketed like cigarettes were in the early days. Meanwhile, countries like the US and Canada are embracing the legalisation of marijuana as each day goes by but those European countries that have not already long embraced the drug (like the Netherlands) have shown little sign of budging on their bans.

Read more on how to invest in the cannabis industry

Top 12 tobacco stocks to watch

1. Philip Morris International
2. Altria Group
3. British American Tobacco
4. Imperial Brands
5. Swedish Match
6. Vector Group
7. Universal Corp
8. Schweitzer-Mauduit International
9. Turning Point Brands
10. Pyxus International
11. 22^nd Century Group
12. Namaste Technologies

The tobacco industry has continued to consolidate heavily over recent years, leaving investors with fewer stocks to pick from – particularly large ones. In terms of market capitalisation, Philip Morris is the largest-listed tobacco stock, but it is a much closer competition when it comes down to revenue and profit:

_{Based on 2018 results. Market cap and all conversions into dollars taken on 20 March, 2019}

However, there are more tobacco stocks to consider than many think, particularly as new vaping and cannabis markets attracts new entrants that should help grow the choice investors have. Many of these companies make small profits or, in some cases, losses.

_{Based on 2018 results. Market cap and all conversions into dollars taken on 20 March 2019}

Below is a basic outline of what each of these stocks do and their financial performance in the most recent financial year of 2018. Results include all operations of each business, even those that are not related to tobacco. You can read the appendix at the bottom of this page, detailing what tobacco stocks performed best in 2018.

Philip Morris International: a pioneer of next-generation products

'Bulid a smoke-free future.'

Philip Morris International (having been spun out from Altria’s Philip Morris USA in 2008) is the owner of Marlboro, the world’s leading cigarette brand, alongside others including L&M, Chesterfield, Parliament and Bond Street. It also owns IQOS, which has developed HEETS and HeatSticks, which are inserted into devices and heated to generate a nicotine-containing vapour. It also licenses Solaris, its first e-vapour products, from Altria. It also has Teeps, which heats tobacco rather than burns it, and is developing STEEM, which aims to replicate the feel and ritual of smoking without tobacco and without burning by generating a nicotine-containing vapour in the form of a nicotine salt.

Philip Morris 2018 results (YoY % change)

Altria Group: a tobacco giant with a diversified future

‘The future of our industry is about innovation, harm reduction and informed consumer choice’

Altria Group is a diversified play, complementing its core tobacco business with investments in alcohol, cannabis and vaping. It owns Philip Morris USA (so has Marlboro and other Philip Morris brands in the US) and the US Smokeless Tobacco Co, the maker of dipping tobaccos Copenhagen and Skoal. It also owns cigar manufacturers John Middleton and Nat Sherman. It owns 35% of the leading vape business in the US, JUUL Labs, and has acquired a notable stake in cannabinoid company Cronos Group.

Altria 2018 results (YoY % change)

BAT: betting big on vaping

‘We are British American Tobacco, a truly global company with a highly successful past and an exciting future ahead of us.’

Having acquired Reynolds American in 2017, BAT is one of the largest players boasting brands including Dunhill, Lucky Strike, Kent, Pall Mall and Rothmans. However, it too is banking on next-generation products, with an ambitious aim to grow revenue from these products more than five-fold to £5 billion in 2022. Its first and main vapour product is named Vype but it has other brands, including Vuse, Ten Motives and Chic Group, which all hold strong positions in different countries.

BAT 2018 results (YoY % change)

Imperial Brands: an early leader in vaping in Europe

‘Our purpose is to create something better for the world's smokers with a portfolio of high-quality next generation and tobacco products.’

Imperial Brands’s core business, Imperial Tobacco, manufactures and markets a range of cigarettes, fine cut and smokeless tobacco products, mass market cigars, and tobacco accessories such as papers and tubes. Cigarette brands include Davidoff, West, JPS, Parker & Simpson and Gauloises Blondes. Further brands owned under ITG Brands include Winston, Maverick, Kool, USA Gold, Salem, Dutch Masters and Backwoods. It also has an international cigar business, Tabacalera. Its Fontem Ventures arm is developing its next-generation products, primarily under its vapour brand blu. It also has a large European distribution business operating across Spain, France, Italy, Portugal and Poland.

Imperial Brands 2018 results (YoY % change)

Swedish Match: cigarette alternatives without the vape

‘Swedish Match’s vision is a world without cigarettes’.

Swedish Match’s and sells snus, moist snuff, chewing tobacco and cigars, under brands including General, Longhorn, ZYN, Onico, White Owl, Game, Red Man, Thunder, Oliver Twist, Fiat Lux, and Cricket. Sales are primarily concentrated in the US and Scandinavia. It also makes matches and lighters. The majority of Swedish Match’s profit is generated by chewing tobacco and cigars (57%), and snus and moist snuff (40%).

Swedish Match 2018 results (YoY % change)

Vector Group: tobacco with a twist of property

‘Vector Group’s tobacco subsidiaries have a proud history of charting an independent course in the tobacco industry’.

Vector Group manufactures and markets cigarettes across the US through two subsidiaries, Liggett Group and Vector Tobacco. Its brands include Pyramid, Grand Prix, Liggett Select, Eve and Eagle 20’s. However, it also has a sizeable real estate business operated under its New Valley subsidiary that owns Douglas Elliman Realty, the largest brokerage in the New York Metropolitan area, as well as investments in property developments in California and New York. Real estate accounts for over one-third of Vector Group’s revenue.

Vector Group 2018 results (YoY % change)

Universal Corp: the raw product provider

‘Universal is committed to maintaining a low-risk profile, one attractive to Investors interested in long-term return, including, an uninterrupted 48-year record of increasing dividend pay-outs.’

Universal’s main business, Universal Leaf Tobacco Co, procures and processes a variety of leaf tobaccos for manufacturers. However, it also has another subsidiary, Carolina Innovative Food Ingredients, which produces quality liquid and dehydrated fruit and vegetable products, including concentrated and non-concentrated juices, purees, and flours. Its third business, Universal Enterprises, tries to add value in the agricultural space, aiding in areas like plant cultivation and harvesting.

Universal Corp 2018 results (YoY % change)

Schweitzer-Mauduit International: much more than tobacco

Schweitzer-Mauduit International is one of the leading companies responsible for packing tobacco into the papers and filters that turn them into cigarettes. The company has expanded into the next-generation product space and is developing multiple ‘Heat-not-Burn’ (HnB) products, building on its world-leading position as a supplier of the reconstituted tobacco that feeds HnB devices. However, tobacco is just a tiny part of the wider business, which makes a wide variety of materials such as yarn, films, netting, tubing and paper.

Schweitzer-Mauduit 2018 results (YoY % change)

Turning Point Brands: new kid on the block

‘To provide adult consumers with a broad portfolio of tobacco and non-tobacco brands that provide superior, satisfying smoking, smokeless tobacco, and vaping experiences.’

Having only been formed in 2004, Turning Point Brands aims to be the leader in next-generation tobacco products and the vape market. It has three product categories: Smokeless Products (mostly snuff and chewing tobacco), Smoking Products (the Zig-Zag cigarette papers and make-your-own cigars), and NewGen, which hosts its vapour products and other novel offerings like Cannabidiols (CBDs) under names such as Vaporfi, Vapor Beast, VaporSupply and VaporShark.

Turning Point Brands 2018 results (YoY % change)

Pyxus International: from tobacco leaf to cannabis leaf

‘Everything we do is to transform people's lives so that together we can grow a better world.’
Formerly named Alliance One, Pyxus primarily supplies tobacco leaf to cigarette makers but it has been drawing attention for its new line of hemp-based CBD products under its Korent brand. It also sells a range of E-Liquids.

Pyxus International 2018 results (YoY % change)

22^nd Century Group: the tobacco scientist

‘22^nd Century is a plant biotechnology company with an important mission: To reduce the harm caused by smoking.’

The 22^nd Century Group claims it can grow tobacco with up to 97% less nicotine than conventional tobacco by genetically engineering and breeding plants. It can also produce tobacco with very high levels of nicotine but low levels of tar. It has numerous subsidiaries, with Goodrich Tobacco providing tobacco products while Botanical Genetics produces cannabis/hemp-based products for human health, well-being and nutrition as well as industrial products. Heracles Pharmaceuticals is centred on a prescription smoking cessation aid called X-22, and NASCO Products is home to its manufacturing facility.

22^nd Century Group 2018 results (YoY % change)

Namaste Technologies: an early cannabis play

‘We are the future of cannabis’.

Dubbed the ‘Amazon of cannabis’, Namaste Technologies is a Canadian company that sells and distributes vaping devices and smoking accessories that is making a big push into the emerging cannabis market. It already sells medical cannabis and is aiming to be the number one online marketplace allowing people to order cannabis on an app much like people order a lift on Uber – all without possessing the cannabis itself.

Namaste Technologies 2018 results (YoY % change)

How to trade tobacco stocks

Those looking to gain exposure to the tobacco industry or the new markets that they are trying to dominate have several options.

Firstly, share dealing allows investors to buy and sell stocks via a broker. This allows investors to benefit from any increases in share price (you can only go long) and dividends that are paid – and you can invest via an ISA or a SIPP.

Secondly, spread betting is a tax-free way of speculating on lots of different markets, including shares. You can go both long and short, and deal some shares out of hours.

Thirdly, CFD trading features many of the same benefits as spread betting – including out-of-hours markets, and the ability to go both long and short. You can also offset losses against future profits for tax purposes.

Are tobacco stocks a good investment?

The countries that have cracked-down on smoking rates have evidently warmed to new replacement products that, as we are told, are all about reducing harm. It is also clear that, however slowly, the attitude in the Western world is only warming to the legalisation of cannabis, whether medical or recreational.

Read about the best marijuana stocks to watch

The tobacco industry is as good at lobbying and shaping its own regulation as it is at selling cigarettes, and the fact these new markets have opened up has turned an industry that was operating on borrowed time to one with prospects and growth opportunities that many thought the industry would never see again. After years of being gradually hamstringed by governments – imposing aggressive anti-smoking measures, stripping them of advertising rights and even their ability to brand their packets – the industry has managed to press the reset button by entering these new industries.

Those that invest in the tobacco industry face the same questions as those that invest in oil. The reputation of both industries has failed to fit-in with a more ethically-aware world and many large institutional investors have already shifted money away from industries deemed to do the planet harm. But the tobacco industry is still generous to shareholders, offering a dividend yield of around 4.8% compared to, for example, a 1.8% yield from the S&P 500 last year. Pay-out ratios are high too, with Philip Morris returning over 91% of cash last year. Dividends are a priority for tobacco stocks and they strive to ensure they deliver consistent growth: Universal Corp has delivered a higher annual dividend for almost 50 consecutive years.

The consistent dividend growth coupled with new growth opportunities means the investment case for traditional tobacco stocks has changed drastically over the last few years. It is highly likely that the world’s largest cigarette companies will be the leaders in the likes of vaping and possibly cannabis (much more so than it is Big Oil will be the leaders in renewable energy), meaning investors should consider them much like any other investment. Today, the decision to invest in the tobacco industry largely comes down to an individual’s ethical standpoint and willingness to invest what will forever been known as a ‘sin stock’.

Appendix: what tobacco stocks performed best in 2018?

The following table shows the YoY percentage movement of each metric in each company’s respective financial year that ended in 2018 (which may not correlate with one another). Pre-tax profit, basic EPS and dividend movements are directly comparable, but revenue figures differ slightly for some stocks (which record net revenue, for example). A negative percentage movement in brackets – ie ‘(-5.0%)’ – means the company reported a smaller loss YoY. The term ‘STP’ stands for ‘Swings To Profit’.

The share price movement is over the 12 months to 27 March 2019.