Should You Invest in the Tobacco Industry?

The stock market has witnessed a massive sell-off due to concerns over the Fed’s aggressive monetary policy stance and the intensifying geopolitical tensions.

The Russia-Ukraine war has entered its third month, and the talks between the two warring nations are yet to show any signs of the issues getting resolved anytime soon. As a result, supply disruptions continue to worsen, and energy and commodity prices remain at uncomfortably high levels.

Inflation is at its highest level since December 1981, while the April jobs data suggested a tight labor market. Investors worry that the Fed’s aggressive monetary policy to fight inflation could lead to recessionary conditions. Moreover, crude oil prices are consistently hovering over $100. Historically, high crude oil prices have precipitated recessionary conditions.

The tobacco industry is well known for being among those few industries that remain largely unaffected by recessionary pressures. The demand for tobacco products is highly inelastic as customers are incredibly loyal to their habits. Also, the solid dividends distributed by tobacco stocks make them investor favorites. Their stable cash flows help them reward shareholders with a steady dividend income stream.

This is why today I’m going to analyze tobacco stocks Altria Group, Inc. (MO), Vector Group Ltd. (VGR), and British American Tobacco p.l.c. (BTI).

Tobacco: The All-Weather Industry

The tobacco industry falls under the “sin” category along with other industries like alcohol and gambling. The tobacco industry includes companies that grow, produce, and sell tobacco and related products such as cigars, pipe and chewing tobacco, and rolling papers.

Due to ethical concerns, tobacco companies are generally avoided by investors who believe in socially responsible investing. However, their attractive valuations, high dividend yields, stable cash flows, and ability to withstand recessionary pressures draw many investors toward tobacco stocks.

However, the tobacco industry faces numerous challenges in the form of stringent government regulations, higher taxes, and health concerns. As people start adopting healthier lifestyles, smoking rates are expected to fall. However, tobacco companies are trying to transform their portfolio by bringing new products such as e-cigarettes, vaporizers, filter-tipped cigarettes, low tar cigarettes, and other non-combustible, low-risk products.

Analysts expect the next phase of growth of tobacco companies to be led by e-cigarettes, vaping and other products due to their growing acceptance. The rising disposable income is also driving the growth of premium tobacco products. In addition, other factors, such as an increase in the number of female smokers and preference for flavored cigarettes, are expected to drive the revenues of tobacco companies.

Investments in tobacco stocks have been highly rewarding, especially with the high barriers to entry, predictable cash flows, and attractive dividend payouts. So, despite investors increasingly flocking toward sustainable investing, tobacco stocks will remain attractive from the return and stability point of view.

According to a Grand View Research, Inc. report, the global tobacco market is expected to expand at a CAGR of 1.8% to reach $1.07 trillion by 2028. Also, according to InsightAce Analytic Pvt. Ltd., the global next-generation tobacco product market is expected to grow at a CAGR of 11.8% to reach $67.38 billion by 2030.

Prominent Industry Participants

Philip Morris International Inc. (PM) and Japan Tobacco Inc. (JAPAY) are two major tobacco stocks. While the PM has gained 6.6% over the past six months, JAPAY has returned 0.3%. PM has a market cap of $154.80 billion, while JAPAY has a market capitalization of $30.82 billion.

PM’s CEO Jacek Olczak said, “Our $1 billion target of achieving sales from non-nicotine products we can also to a very large extent achieve organically.”

3 Tobacco Stocks Stocks to Buy Now

Altria Group, Inc. (MO)

MO manufactures and sells smokable and oral tobacco products in the United States. The company provides cigarettes primarily under the Marlboro brand; cigars and pipe tobacco principally under the Black & Mild brand; and moist smokeless tobacco products under the Copenhagen, Skoal, Red Seal, and Husky brands, as well as provides on! Oral nicotine pouches.

Analysts expect MO’s EPS for the quarter ending September 30, 2022, to increase 9% year-over-year to $1.33. Its revenue for fiscal 2023 is expected to increase 1.6% year-over-year to $21.39 billion. It surpassed consensus EPS estimates in three of the trailing four quarters. Over the past six months, the stock has gained 23.3% to close the last trading session at $55.26.

In terms of trailing-12-month gross profit margin and net income margin, MO’s 66.57% and 14.30% are 92.2% and 164.2% higher than the industry averages of 34.63% and 5.41%, respectively. Also, its trailing-12-month EBIT margin and EBITDA margin of 57.67% and 58.78% are higher than the industry averages of 9.27% and 12.60%, respectively.

MO’s forward annual dividend of $3.60 translates into a 6.51% yield. This compares to its 4-year average yield of 6.88%. The company’s dividend payouts have grown at a CAGR of 8.3% over the past five years.

MO’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which equates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

It has an A grade for Quality. Within the B-rated Tobacco industry, it is ranked #3 out of 10 stocks. To see the other ratings of MO for Growth, Value, Momentum, Stability, and Sentiment, click here.

Vector Group Ltd. (VGR)

VGR manufactures and sells cigarettes in the United States. It operates in two segments, Tobacco and Real Estate. The company produces cigarettes in 100 combinations under the EAGLE 20’s, Pyramid, Montego, Grand Prix, Liggett Select, Eve, USA brand names, and various partner and private label brands.

For fiscal 2022, VGR’s EPS and revenue are expected to increase 8% and 7.2% year-over-year to $1.21 and $1.31 billion, respectively. Over the past year, the stock has gained 38.6% to close the last trading session at $12.48.

In terms of trailing-12-month gross profit margin and net income margin, VGR’s 57.40% and 27.92% are 65.7% and 415.9% higher than the industry averages of 34.63% and 5.41%, respectively. Also, its trailing-12-month EBIT margin and EBITDA margin of 43.23% and 45.31% are higher than the industry averages of 9.27% and 12.60%, respectively.

VGR’s forward annual dividend of $0.80 translates into a 6.41% yield. This compares to its 4-year average yield of 9.88%.

VGR’s POWR Ratings reflect this promising outlook. The stock has an overall rating of B, which equates to a Buy in our proprietary rating system.

It has a B grade for Value and Quality. It is ranked first in the same industry. To see the other ratings of VGR for Growth, Momentum, Stability, and Sentiment, click here.

British American Tobacco p.l.c. (BTI)

Headquartered in London, the United Kingdom, BTI is a multi-category consumer goods company that provides tobacco and nicotine products. It invests in building a portfolio of tobacco and nicotine products alongside its traditional tobacco business, including vapor, tobacco heating, and modern oral products.

Analysts expect BTI’s EPS and revenue for fiscal 2023 to increase 8.3% and 3.9% year-over-year to $5.07 and $34.33 billion, respectively. Over the past six months, the stock has gained 17% to close the last trading session at $40.72.

In terms of trailing-12-month gross profit margin and net income margin, BTI’s 82.10% and 26.48% are 137% and 389.2% higher than the industry averages of 34.63% and 5.41%, respectively. Also, its trailing-12-month EBIT margin and EBITDA margin of 42.83% and 46.48% are higher than the industry averages of 9.27% and 12.60%, respectively.

BIT’s forward annual dividend of $2.87 translates into a 7.27% yield. This compares to its 4-year average yield of 6.91%. The company’s dividend payouts have grown at a CAGR of 5.6% over the past five years.

BTI’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to a Buy in our proprietary rating system.

It has a B grade for Stability and Sentiment. Again, it is ranked #4 in the same industry. Click here to see the other ratings of BTI for Growth, Value, Momentum, and Quality.

MO shares were trading at $50.68 per share on Tuesday afternoon, down $4.58 (-8.29%). Year-to-date, MO has gained 8.78%, versus a -15.43% rise in the benchmark S&P 500 index during the same period.

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.

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