Undoubtedly one of the most controversial sectors for decades, the tobacco industry has been the subject of litigation and restrictive legislation from various governments, while it has been heavily criticised for having a history of obscuring evidence around the health impacts of cigarettes. Then in July 2021, Philip Morris’ CEO, Jacek Olzak stated that the UK government should treat cigarettes like the likes of petrol cars and ban them in 10 years’ time, whereas a few days later, British American Tobacco’s executive, Kingsley Wheaton also stressed the importance of reducing the harmful effects of tobacco and nicotine. Many wondered why the world’s largest tobacco companies would take such a stance in what appeared to be self-sabotage.
Yet, as the industry has to contend with a declining customer-base of traditional smokers, these companies appear to have an ace up their sleeve – cessation products, such as e-cigarettes, vape product and heated tobacco technologies. At the same time, they are increasingly becoming notable players in the cannabis industry, by both providing consumers alternative products that do not contain nicotine, as well as investing in the medical segment of the cannabis industry.
Reflecting an ongoing business model shift based on consumer trends, here are some top tobacco companies that are successfully reinventing themselves and have since caught investors’ attention.
Philip Morris (PM)
It sells more than a tenth of cigarettes worldwide and it is home to some top brands like Marlboro, Benson & Hedges, S.T. Dupont Paris and many others, while it forms part of Big Tobacco – a group of the largest global tobacco industry companies. Tracing its roots to a London tobacconist by the same name who opened a single shop on London’s Bond Street in 1847, the original company sold tobacco and cigarettes and until a spin-off in 2008, Philip Morris was an operating arm of Altria, another industry heavyweight.
Although initially, the tobacco giant expanded its flagship and regional brands across a number of countries with higher smoking rates, lower taxes and fewer tobacco regulations than the U.S., the company has had it tough over the past few years as it struggled with legal challenges and higher excess taxes in many countries. Coupled with the decline in smoking, many analysts felt that its stock’s reputation of being a safe haven was at risk. Then, on August 20, 2021, it hit a two-year high, topping $101.42 per share. The price spike, together with its current dividend yield of 4.76% brought about renewed interest amongst investors.
What’s more, the expansion of its heated tobacco business is gradually offsetting its core cigarette business. In the first quarter of 2021, 28% of the company’s revenue was generated from smoke-free products. As for the second quarter of 2021, Philip Morris witnessed volume growth across cigarettes and heated tobacco product categories, with adjusted EPS (earnings per share) at $1.57, while its net revenues of $7,594 million increased 14.2% from the figure reported in the year-ago quarter. Meanwhile, its cigarette alternative IQOS has continued to grow, surpassing an estimated 20 million users by quarter-end, driving sequential quarterly heated tobacco unit in-market sales volume growth of 8%. Thanks to the positive quarter results, Philip Morris has increased its full-year adjusted outlook, with organic net revenue growth of 6% to 7% and adjusted EPS growth of 12% and 14% on the same basis. According to the company, the outlook further supports its plans for a three-year share repurchase programme of up to $7 billion.
After building one of the most successful cigarette companies, now, Philip Morris is establishing a future based on smoke-free products, while it is pushing into healthcare by snapping up a 22.6% stake in Vectura, the maker of inhaled medicines and devices aimed at treating respiratory illnesses, as it closes in on the controversial £1.1 billion takeover. The acquisition has raised quite a few eyebrows, however, Philip Morris has pledged that the group will operate as an autonomous unit focused on therapeutic uses.
And perhaps most surprisingly of all, the firm has said that it could stop selling cigarettes in the UK in the near future as it focuses on alternatives, such as heated tobacco. In fact, it plans to halt all cigarettes in Japan, its top IQOS market, a move that it is expected to repeat elsewhere. And while health campaigners have voiced their concerns on Vectura falling into the hands of Big Tobacco, others have pointed at Big Oil’s embrace of renewable energy and how Philip Morris is simply reinventing itself in the same manner. If anything, its launch of IQOS in 2014 and its intentional shift away from traditional cigarettes could simply reflect that it is a forward-thinking company.
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Altria Group (MO)
In 1985, Philip Morris Companies was incorporated as a holding company and parent of Philip Morris Inc, however, it was eventually renamed Altria Goup in 2003, with the aim to better reflect the diversity of its portfolio beyond tobacco. Yet, despite the company’s major attempts at branching out into other lines of business, Altria’s primary business and that of its subsidiaries remains tobacco, with tobacco-related products making up about 98% of its $26.2 billion net revenue in 2020.
Focused on the long-term success of its business and of delivering consistent shareholder returns, Altria has been doing fairly well, surpassing consensus EPS estimates three times over the last four quarters. In July, the company reported second-quarter results that beat expectations, while it raised the low end of its full-year profit outlook. Quarterly earnings came in at $1.23 per share, compared to the $1.09 per share a year ago, while it posted revenues of $5.61 billion for the quarter ended June 2021, when compared to the year-ago revenues of $5.06 billion. In addition, it repurchased 6.6 million shares at an average price of $49.21, for a total cost of $325 million.
Beyond its financials, Altria remains a top pick among many high-yield investors, with its current yield at 7.10%. Some analysts have been wondering whether the company’s record of dividend increases may come to an end, however, there’s no reason to think that this may be the case. The firm has been able to grow its core cigarette business by raising its prices, while its dividend policy target of paying out 80% of its adjusted earnings still holds. Meanwhile, its stock is up almost 13% over the last few months, currently trading at $48.81 on August 23, 2021. Despite forming part of the defensive tobacco industry, the stock has registered strong gains over recent months, partly due to the fact that a number of analysts have revised their expectations about the company’s earnings for 2021 on a positive trend.
And similarly to Philip Morris, Altria too is envisioning itself helping adult smokers to transition to a smoke-free future. According to the firm, with over 20 million U.S. smokers seeking less harmful alternative to cigarettes and with the demand for non-combustible alternatives at an all-time high, the company is in a position to make progress on this front by offering smokers more choices. On December 20, 2018, Altria finalised the acquisition of a 35% stake in e-cigarette company JUUL Labs for $12.8 billion, in what has been dubbed a marriage between an old-line tobacco giant and a fast-growing electronic-cigarette rival looking to make inroads among smokers. At the same time, the company announced its intent to acquire a 45% stake in Cronos Group for $1.8 billion. The move has afforded Altria a seat at the table in the cannabis industry and the ability to reignite top-line growth in due course.
Go ahead and buy Altria (MO) stock.
British American Tobacco (BATS)
It’s the owner of well-known tobacco brands like Lucky Strike and Dunhill, while as of 2019, it is the largest tobacco company in the world based on net sales. Headquartered in London, British American Tobacco was established in 1902, when the UK’s Imperial Tobacco Company and the U.S.’ American Tobacco Company agreed to form a joint venture. Along the years, the company has made several mergers and acquisitions, growing its business and expanding its portfolio. Some of the most notable ones include its merging with Rothmans International in 1999 and its acquisition of Ente Tabacchi Italiani in 2003, Italy‘s state tobacco company – an important acquisition which catapulted the British American Tobacco to the number two spot in Italy, the second largest tobacco market in the European Union (EU).
In July 2021, the company announced that vaping and e-cigarettes now account for more than a tenth of sales after customers migrated to its new products. More specifically, the number of users using its so-called new categories have increased from 2.6 million to 16.1 million in the first half of this year, 80% of the customer acquisition in 2020 as a whole, while its vape brand Vuse and heated tobacco line Glo make up 11.8% of the group’s revenue, up from about zero just six years ago. Total cigarette volumes rose 1.8% in the first half of 2021 compared with the same period in 2020, while revenues increased 8.1% to £12.2 billion, which reflects a 50% increase in New Categories revenue to £883 million.
On the other hand, the company has managed to partly offset volume declines with price increases, while emerging markets like the likes of Brazil, South Africa and Vietnam have recovered relatively well following the COVID-19 lockdowns throughout 2020. If anything, the pandemic has also shown that overall demand for cigarettes has held up well, at least for now, according to the British American Tobacco.
And while for decades the company has been a highly effective cash generating machine and has rewarded investors well, its stock reached its peak in 2016-2017 and has struggled to reach these highs ever since. Some analysts claim that the market has overreacted on a perception based exclusively on the declining smoking customer rates when attention should also be directed elsewhere, such as the company’s leading position, scale, global reach, superior profitability and the fact that it enjoys good margins, while it is actively developing alternative products. Indeed, British American Tobacco has invested heavily in its vaping, e-cigarette and ‘modern oral’ nicotine brands, pouring in £346 million in the six months to the end of June, a starkly higher amount when compared to the £426 million injected for the whole of 2020 and according to chief executive Jack Bowls, more capital will be pumped into the new categories in the second half of the year.
To add British American Tobacco (BATS) to your portfolio, click here.
Imperial Brands (IMB)
Headquartered in Bristol, England, Imperial Brands is the world’s fourth-largest international cigarette company measured by market share, while it is considered among the largest producers of fine-cut tobacco and tobacco papers. Among its brands, the company boasts names like Davidoff, Golden Virginia, Drum and others, while its Rizla brand is the world’s best-selling rolling paper.
A dividend powerhouse, the company has been sustaining a positive dividend growth, with a yield that has consistently grown 10% between 2014 and 2020. But with the onset of the COVID-19 pandemic, the firm was forced to reduce its payout so that it could cut down on debt as its tobacco sales were flat and vaping revenues had taken a tumble. Yet, what places Imperial Brands in a favourable position is the fact that as a tobacco manufacturer it can benefit from regular customer demand and by owning premium brands like John Player Special and West, it boasts stronger pricing power. Last year, the company paid out 47% of its profit as dividend and then on May 18, it announced that shareholders will be paid a dividend of 42.12 pence per share, an increase from the previous dividend payout of 41.70 pence per share.
Part of the company’s appeal other than its dividend payout is that its earnings per share have been improving, rising 11% per-year-over the last five years. In May, the company reported an increase in first-half revenue, helped by higher cigarette prices and double-digit sales growth of e-cigarettes and cigars in the U.S. Organic adjusted revenue for the six months ended March 31 totalled £3.57, up 3.5% year-over-year in constant currencies compared to the same period a year earlier, when global lockdowns spurred tobacco retailers to stock up on cigarettes. On the other hand, organic adjusted EPS came in at 107.0 pence, up 6.9% at constant currency and up 7.0% at actual rates. As for its stock, this was trading at £1,311.40 on March 20, 2020, during the pandemic lows, however since then, it has increased, currently trading at £1,530 on August 24, 2021.
The firm has been perhaps one of the few companies to actively attempt to distance itself from tobacco, so much so, that in 2016 it rebranded its name from Imperial Tobacco to Imperial Brands. Meanwhile, following along the same path as its competitors, the company’s subsidiary Imperial Brands Ventures tapped into the cannabis industry by investing in Oxford Cannabinoid Technologies, a biopharmaceutical company focused on researching, developing and licensing cannabinoid-based compounds and therapies. Spotting a golden opportunity, Imperial Brands is set to capitalise on this growing market.
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How to invest in Tobacco stocks with CCTrader
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To do so:
- Download the app from either Google Play or the Apple App Store. Alternatively, you may access CCTrader on your desktop by visiting https://live.cctrader.com/
- Once you’ve onboarded successfully and have funded your account, head over to the search bar at the top of your screen and input either the company name or ticker symbol.
- Select the instrument of your choice from the list and then click on the Buy button on the window located at the bottom of your screen.
- On the New Order page, input the number of shares you would like to purchase and hit the Place Buy Order. The stock has been added to your portfolio.
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