Cigarette smoking is on the decline. The practice has been outlawed in most pubs, restaurants, and public spaces in the United States. At the same time, the price of cigarettes continues to climb. However, that does not mean that the industry is dying – or at least the tobacco companies themselves are not.
Big tobacco has been facing headwinds for years and they are still keeping on and staying profitable. It has been 25 years since the infamous “Marlboro Friday” – that was the day that Philip Morris tried to cut the prices of Marlboros by 20% in a bid to compete with generic cigarettes. Its stock fell 26% the day it announced the price shift, causing the company to lose $10billion of its market cap.
Plus, new technologies and different products are paving the way for additional income streams.
Pros and Cons of Investing in Tobacco Stocks
Tobacco stocks tend to be somewhat stable because people rarely quit the habit for good – and that shows in the share price.
The share prices of tobacco companies have outperformed rival sectors. The MSCI World Tobacco Index over much of the past decade beat the MSCI World Index by approximately 3X.
Even the high-profile technology sector hasn’t done as well as Big Tobacco, with this sector only gaining about 90% in the same period.”
Then, there is the nature of tobacco products to consider. Small price increases are often not enough to make someone switch brands, let alone stop smoking.
Its recession-proof too. When money is tight, people may stop buying clothing or eating out, but they still buy their smokes. Plus, while innovation is a part of the game, the tobacco industry does not require the same level of innovation as many other companies – its products are practically unchanged from their debut.
Will Tobacco Alternatives Kill Tobacco Companies?
The short answer is No. Tobacco alternatives won’t kill tobacco companies because they are getting in the game too. Most of big tobacco saw the trends were shifting towards e-cigarettes and they got into the game.
On the far horizon, the cannabis industry is beckoning. “With legalization nearing reality on the federal level,” says Forbes contributor Karl Kaufman, “Big Tobacco companies have the distribution capabilities in place to package and sell marijuana once it’s officially legal” – and the trend is already starting.
According to NASDAQ, UK-based Imperial Brands (they make Winston and Kool cigarettes) joined up Casa Verde (Snoop Dogg the rap musician is one of its investors) to invest in Oxford Cannabinoid Technologies, a British marijuana research firm.
Which Tobacco Stocks are Best to Buy Now?
Phillip Morris International (NYSE:PM) is an international cigarette and tobacco product manufacturer that pays a handsome 5.5% dividend yield.
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.
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.
Japan Tobacco offers a 5.25% dividend yield at last count.
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 Divided 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.