Cigarette smoking is in a secular decline but the tobacco industry remains extremely profitable. And as manufacturers develop new reduced-risk products to help wean smokers off cigarettes, new avenues of growth open. With the tobacco industry going through a major overhaul, investors are looking for the next top tobacco stock.
Combustible cigarettes are still the industry’s mainstay. Where tobacco products represent a near-$1 trillion opportunity in 2024, cigarettes hold the largest share at $854 billion, according to Statista. Still, it is no longer a high-growth business, but rather a mature, steady-state one. Investors can only expect low, single-digit growth. Where the real opportunity lies in dividend payments.
All of the major tobacco stocks pay dividends that yield 5% or more. Understanding their slow-growth business, the players have committed to returning much of their cash flows to shareholders in the form of dividends. That means your portfolio can profit from the ongoing transformation of the industry.
Below are the three top tobacco stocks to buy. Let’s see which one would be the best fit for your portfolio.
Altria (MO)
United States tobacco giant Altria (NYSE:MO) is the first major cigarette company to consider. The owner of the iconic Marlboro brand, which owns 42% of the market, reported smokeable products represent 88% of total first-quarter revenue of $5.5 billion. Yet sales were down 3.6% from last year as volumes fell, though the industry as a whole saw volumes decline.
However, this was offset by an increase in oral tobacco products, primarily its on! nicotine pouches, which saw shipment volumes surge over 32% year-over-year. However, with just $651 million in revenue, it is a far smaller segment.
Altria is late to the electronic cigarette market. Well, it was early with its near-$13 billion investment in leading e-cig maker Juul Labs, but that turn into a fiasco that Altria eventually wrote off. The Food & Drug Administration blamed Juul for the rise in teenage vaping and mounted a relentless attack on the company. Juul used to own over three-quarters of the e-cig market but that share has since dropped to around a 24%. Good enough for second place but a far cry from its industry dominance.
But Altria bought third-place NJOY last year, which now has a 4.3% share and growing. It shipped 1 million units in the first quarter and 10.9 million consumables. NJOY is the only pod-based e-cig maker with FDA marketing authorization.
The tobacco stock pays a dividend that yields a mouth-watering 9.1% annually. Altria has raised its payout for over 50 consecutive years making it a Dividend King. The payout is solid as Altria generates more than enough free cash flow (FCF) to support the dividend.
British American Tobacco (BTI)
Unlike Altria, rival British American Tobacco (NYSE:BTI) is a global tobacco company with 27.3 billion British pounds sterling (approximately $34.1 billion) in annual sales. The U.S., though, is its largest market representing 44% of total sales. BAT owns some of the most popular brands, including Newport, Camel, Lucky Strike and Pall Mall.
British American is also the leading e-cig seller. Its Vuse brand of e-cigs commands a 42.4% share of the U.S. market. It was able to capitalize on the problems of Juul and essentially steal away the market from it. Global revenue in the segment jumped 47% in 2023 but saw the greatest gains in European markets including Germany, Italy and Poland.
The tobacco stock also saw strong growth in its nicotine pouch business it sells under the Velo brand. Revenue jumped 39% from the previous year in constant currency terms.
Arguably the most important change BAT has made is essentially saying its U.S. cigarette business is worth nothing. Last December, the tobacco company announced it would take a $31.5 billion charge as it believes the U.S. cigarette market will evaporate in 30 years. It will begin amortizing that part of its business beginning this year. To meet the challenge, it wants to generate half its revenue from non-combustibles by 2035.
The accounting change is going to impact BAT’s results going forward. And though it claims it is merely “accounting catching up with reality,” it may be a much too grim focus that undercuts its business. With a dividend yielding over 10% annually, British American Tobacco stock becomes a riskier play.
Philip Morris International (PM)
Spun off from the tobacco giant in 2007, Philip Morris International (NYSE:PM) has the leading e-cig on the market with its heated tobacco device IQOS. Although briefly introduced in the U.S. through a marketing agreement with Altria, the IQOS was banned from import after PM was sued by British American because the device violated BAT’s patents.
Philip Morris remains committed to moving away from cigarettes. The global tobacco giant, the largest tobacco company outside of China, reported its smoke-free business accounted for 39% of total net revenues. Organic revenue growth jumped almost 25% in the period and IQOS has the leading market share in many markets.
However, like its rivals, Philip Morris also saw a big jump in nicotine pouch sales with a 40% increase in Zyn brand volume driven by a near-80% surge in the U.S. market. Nicotine pouches may become the future of the tobacco industry. With no dangerous, acrid smoke from cigarettes and no annoying vapor clouds from e-cigs, users still get the nicotine hit they seek. Euromonitor International estimates pouches will be a $15 billion market in 2027. PM owns this new, “modern oral” products niche with a 60% share due to its acquisition of Swedish Match in 2022.
The global giant also pays a dividend that yields 5.3% annually.
On the date of publication, Rich Duprey held a LONG position in MO stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
