Cigarette smoking is on the decline in the United States. The practice has been outlawed in most public places, and the price of cigarettes has been rising. However, the tobacco industry is not dying. Big tobacco companies have been facing headwinds for years, but they have managed to stay profitable.

In 1995, Philip Morris tried to cut the prices of Marlboros by 20% in a bid to compete with generic cigarettes. This move backfired, as the company’s stock fell 26% and its market capitalization fell by $10 billion.

Despite these challenges, the tobacco industry is still finding ways to make money. New technologies and different products are paving the way for additional income streams. For example, some tobacco companies are investing in e-cigarettes and other nicotine-delivery devices.

If you had to pick, what are the best tobacco stocks to buy?

1. Altria Group (NYSE:MO)
2. Phillip Morris International (NYSE:PM)
3. Japan Tobacco (NASDAQOTH:JAPAF)
4. Vector Group (NASDAQ:VGR)

The Good, Bad & Ugly Of Tobacco Stocks

Tobacco stocks have historically been stable because people rarely quit smoking for good. This is reflected in the share price of tobacco companies, which have outperformed rival sectors over the past decade. For example, the MSCI World Tobacco Index has beaten the MSCI World Index by approximately 3X.

There are several reasons for this stability.

1. Small price increases are often not enough to make smokers switch brands or quit smoking altogether.
2. Tobacco products are recession-proof. When money is tight, people may stop buying non-essential items, but they still buy cigarettes. 
3. The tobacco industry does not require the same level of innovation as many other industries. Tobacco products have remained largely unchanged since their debut, meaning that tobacco companies do not need to invest heavily in research and development.

Tobacco stocks are a relatively stable investment because of the nature of tobacco products and the behavior of smokers.

Will Tobacco Alternatives Kill Tobacco Companies?

Tobacco companies are not going away anytime soon. They are seeing the writing on the wall and are getting into the tobacco alternative game.

E-cigarettes were a big trend, and most big tobacco companies invested in this market. However, Altria’s investment in Juul went sour when the safety of the product was called into question.

Now, tobacco companies are looking to the cannabis industry. With federal legalization nearing reality, big tobacco companies have the distribution capabilities to package and sell marijuana once it is legal.

For example, UK-based Imperial Brands (which makes Winston and Kool cigarettes) joined up with Casa Verde (an investment firm co-founded by rapper Snoop Dogg) to invest in Oxford Cannabinoid Technologies, a British marijuana research firm.

This shows that tobacco companies are adapting to the changing market and are not going to be left behind. They are well-positioned to take advantage of the growth of the tobacco alternative and cannabis markets.

Best Tobacco Stocks To Buy Now?

Phillip Morris International (NYSE:PM) is an international cigarette and tobacco product manufacturer that pays a handsome dividend yield of 8.25%.

The company is in the process of getting FDA approval for a reduced-risk device called iQOS. The product was recently introduced in Japan and it already has 11% of the market share there.

The iQOS delivers all the experience of smoking without the nicotine through a technology called “heat-not-burn” or HNB for short.

The FDA will rule whether the iQOS is, in fact, safer than traditional cigarettes. If not, it will decide whether the product can be sold in the United States.

Altria (NYSE:MO) spun off from Philip Morris International roughly ten years ago. At the time of our research, it pays a 5.2% dividend.

Like PM, Altria also has e-cigarettes – and the Marlboro brand.

While the company’s e-cig products have just 15% of the market share in the US, if Philip Morris wins with the FDA, Altria will be marketing the Philip Morris iQOS in the United States as Marlboro HeatSticks.

The whole deal is confusing and is leading to speculation that Philip Morris will ultimately acquire Altria (Spolier Alert: Wells Fargo says the probability of this happening is 70%).

Japan Tobacco (NASDAQOTH: JAPAF) has a different strategy. It does have smokeless products, including its Ploom TECH device – a direct competitor for PM’s iQOS.

In May 2018, JAPAF began engaging in offensive pricing strategies, dropping the price of the Ploom TECH by 25% and it remains in competition.

However, while the company is spending more on smokeless devices, most of Japan Tobacco’s strategy is centered on emerging markets and places where smoking is prevalent.

Since 2017, the company has spent over $3 billion in acquisitions, including companies in Indonesia, the Philippines, and Russia.

Most recently, Japan Tobacco acquired the tobacco operations from the Bangladeshi Akij Group for the equivalent of $1.5 billion, branching into one of Asia’s fastest-growing economies in the process.

Vector Group (NYSE:VGR) is not 100% about cigarettes and associated products. While that used to be its core business, only 58% of the company’s revenue company from tobacco.

In fact, one of its subsidiaries is the Liggett Group, which is 4th amongst cigarette makers in the US. The rest is high-end property.

Vector’s real estate subsidiary is called New Valley. It has a 70.6% stake in Douglas Elliman Realty, a major player in New York City and, by coincidence, is 4th amongst residential real estate companies in the US. It is an interesting mix, but it works. Vector Group pays a dividend yield of around 11.6% when we last took stock of it.

Are Tobacco Dividend Stocks Worth Buying?

No matter where you sit on the tobacco divide – they are called “sin stocks” for a reason – the tobacco industry is filled with companies that are objectively stable performers with strong yields.

In general, the best performers are the most stable with the largest market share and those with an eye on the horizon.

While returns are never guaranteed, you have to play to win – just stay tuned to developments in the regulatory space.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.