Despite regulations aimed at reducing tobacco consumption, the industry is expected to witness continued growth owing to its strong demand, new product introductions, and extensive marketing campaigns.
Thus, it could be wise to invest in quality tobacco stocks Altria Group, Inc. (MO) and British American Tobacco p.l.c. (BTI) that stands to benefit from the industry’s tailwinds. Let’s discuss this in detail.
Although several countries have implemented strict regulations and restrictions to curb tobacco consumption, the tobacco industry’s growth remains unabated. Rising smoking prevalence and stable demand for tobacco products drive the industry’s growth. Approximately 28.3 million American adults smoke cigarettes.
Furthermore, the introduction of numerous new, innovative tobacco products such as heated tobacco products, dissolvable tobacco, menthol cigarettes, and smokeless tobacco is sustaining consumer demand, thereby contributing to the industry’s expansion. The tobacco industry also spends massively on advertising and promotions, which amounts to billions of dollars annually.
According to a report by Grand View Research, the global tobacco market size is expected to reach $1.05 trillion by 2030, growing at a 2.4% CAGR. Investors’ interest in tobacco stocks is evident from the NASDAQ US Benchmark Tobacco Index’s 7.6% returns over the past six months.
Against this backdrop, investing in fundamentally sound tobacco stocks MO and BTI could be wise, which are poised to benefit from the industry's bright growth prospects.
Let’s discuss the featured stocks in detail.
Altria Group, Inc. (MO)
MO produces and markets smokeable and oral tobacco products globally. Its cigarette portfolio includes Marlboro, while its cigar and pipe tobacco offerings feature Black & Mild. MO also sells moist smokeless tobacco, snus products under brands like Copenhagen, Skoal, Red Seal, and Husky, and oral nicotine pouches called on!
On March 6, MO announced that it would acquire NJOY Holdings, Inc. for $2.75 billion in cash payable at closing. NJOY is a manufacturer and distributor of e-cigarettes and vaping products.
The acquisition would expand MO's smoke-free portfolio to include these products and provide them with complete global ownership of products and technologies in the three largest smoke-free categories. MO would also enter a joint venture with JT Group to commercialize heated tobacco stick products in the United States.
MO’s trailing-12-month gross profit margin of 68.82% is 118.2% higher than the 31.55% industry average. Also, the stock’s trailing-12-month net income margin of 27.10% is 759% higher than the 3.16% industry average.
MO has raised its dividends for 53 consecutive years. It pays a $3.76 per share dividend annually, translating to an 8.23% yield on the current price level. Its dividend payments have grown at a 7.2% CAGR over the past five years, and its four-year average dividend yield is 7.60%.
During the first quarter that ended March 31, 2023, MO’s net revenues from oral tobacco products increased 2.4% year-over-year to $628 million. Its adjusted earnings before income taxes rose 3.3% from the year-ago value to $2.82 billion. In addition, the company’s adjusted net earnings grew 3.5% from the previous year’s period to $2.12 billion, and its EPS increased 5.4% year-over-year to $1.18.
The consensus revenue estimate of $21.22 billion for the fiscal year ending December 2024 reflects a 1.7% year-over-year improvement. Likewise, the consensus EPS estimate of $5.27 for the next year indicates a growth of 4.4% year-over-year. Moreover, the company surpassed the consensus EPS estimates in three of the trailing four quarters.
Over the past six months, the stock has gained 2.9% to close the last trading session at $45.67.
MO’s solid fundamentals are apparent in its POWR Ratings. The stock has an overall rating of B, equating to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
MO has an A grade for Quality and a B for Growth. It is ranked #5 in the A-rated 9-stock Tobacco industry.
In addition to the POWR Ratings I’ve just highlighted, you can see MO’s ratings for Value, Stability, Sentiment, and Momentum here.
British American Tobacco p.l.c. (BTI)
Headquartered in London, United Kingdom, BTI provides tobacco and nicotine products globally. The company's portfolio includes vapor, tobacco heating, modern oral nicotine products, combustible cigarettes, and traditional oral items like snus and moist snuff.
On February 9, the company declared an interim dividend of 230.9p per ordinary share of 25p, payable in four equal quarterly installments of 57.72p per ordinary share in May 2023, August 2023, November 2023, and February 2024.
BTI pays a $2.68 per share dividend annually, translating to a 7.84% yield on the current price level. Its four-year average dividend yield is 7.21%.
BTI’s trailing-12-month gross profit margin of 82.63% is 161.9% higher than the 31.55% industry average. Likewise, the stock’s trailing-12-month EBITDA margin of 44.09% is 326.31% higher than the 10.34% industry average.
For the year that ended December 31, 2022, BTI’s revenue increased 7.7% year-over-year to £27.66 billion ($34.55 billion). Its profit from operations rose 2.8% from the year-ago value to £10.52 billion ($13.15 billion). Also, the company’s profit before taxation grew 1.8% from the prior year’s period to £9.32 billion ($11.65 billion).
Moreover, as of December 31, 2022, the company’s total assets stood at £153.55 billion ($191.86 billion), compared to £137.37 billion ($171.64 billion) as of December 31, 2021.
Analysts expect BTI’s revenue to increase 6.4% year-over-year to $35.66 billion for the fiscal year ending December 2023. The company’s revenue for the fiscal year 2024 is expected to rise 3.4% year-over-year to $36.87 billion. Shares of BTI plummeted 1.7% intraday to close the last trading session at $34.22.
BTI’s solid fundamentals are apparent in its POWR Ratings. The stock has an overall rating of B, which translates to Buy in our proprietary rating system.
BTI has a B grade for Stability, Quality, and Sentiment. It has topped the 9-stock Tobacco industry.
Click here to access additional BTI ratings for Value, Growth, and Momentum.
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MO shares were trading at $45.71 per share on Friday morning, up $0.04 (+0.09%). Year-to-date, MO has gained 2.13%, versus a 7.87% rise in the benchmark S&P 500 index during the same period.
About the Author: Aanchal Sugandh
Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.
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