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Top 3 Tobacco Stocks for Sustainable Gains

The tobacco industry is expected to expand due to sustained consumption, falling inflation, innovative products, and the rising demand in emerging markets. Given the industry’s solid growth prospects, investors could consider buying quality tobacco stocks: Altria Group (MO), British American Tobacco (BTI), and Vector Group (VGR). Read on...

The tobacco industry is expected to remain resilient due to consistent demand, innovative products such as e-cigarettes, the ability to adapt to changing regulations and consumer preferences, and investments in alternative revenue streams.

Considering the industry’s bright prospects, quality tobacco stocks Altria Group, Inc. (MO), British American Tobacco p.l.c. (BTI), and Vector Group Ltd. (VGR) could be wise additions to your portfolio for substantial returns.

Before diving deeper into their fundamentals, let’s discuss why the tobacco industry is well-positioned for growth.

Despite being subject to higher taxes, stringent regulations, and health risks, global tobacco consumption has been growing due to its addictive nature. The global tobacco market is expected to increase at a 2.1% CAGR, reaching $1.06 billion by 2032.

Tobacco companies are looking to drive further growth by launching new products such as snus, e-cigarettes, and nicotine pouches, which are considered a safer alternative to traditional tobacco. The global e-cigarette and vape market is predicted to reach $66.20 billion by 2032, growing at a CAGR of 4.5%.

With these favorable trends in mind, let’s delve into the fundamentals of the three best Tobacco stocks, beginning with the third choice.

Stock #3: Altria Group, Inc. (MO)

MO manufactures and sells smokable and oral tobacco products. They offer cigarettes under the Marlboro brand, cigars and pipe tobacco under the Black & Mild brand, and moist smokeless tobacco and snus products under brands like Copenhagen, Skoal, Red Seal, and Husky.

In terms of the trailing-12-month EBIT margin, MO’s 59.49% is 583.2% higher than the 8.71% industry average. Likewise, its 21.08% trailing-12-month Return on Total Assets is 319.2% higher than the industry average of 5.03%. Furthermore, the stock’s 67.73% trailing-12-month levered FCF margin is significantly higher than the industry average of 5.20%.

MO’s net revenues for the fourth quarter ended December 31, 2023, came in at $5.98 billion. Its gross profit stood at $3.50 billion. Its adjusted net earnings and EPS came in at $2.08 and $1.18, respectively.

As of December 31, 2023, MO’s current portion of long-term debt stood at $1.12 billion, compared to $1.56 million as of December 31, 2022.

Street expects MO’s EPS for the quarter ending June 30, 2024, to increase marginally year-over-year to $1.32. Its revenue for the quarter ending September 30, 2024, is expected to increase 1.2% year-over-year to $5.34 billion. Over the past month, the stock has gained 5.1% to close the last trading session at $42.93.

MO’s POWR Ratings reflect this promising outlook. It has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

MO has an A grade for Quality. Within the A-rated Tobacco industry, it is ranked #5 out of 9 stocks. To see MO's additional ratings for Growth, Value, Momentum, Stability, and Sentiment, click here.

Stock #2: British American Tobacco p.l.c. (BTI)

Headquartered in London, the United Kingdom, BTI provides tobacco and nicotine products to consumers worldwide. It offers vapor, tobacco heating, modern oral nicotine products, combustible cigarettes, and traditional oral products like snus and moist snuff. The company provides its products under the Vuse, glo, Velo, Grizzly, Kodiak, Dunhill, and Kent brands.

On March 11, 2024, BTI announced opening a £30 million ($38.18 million) Innovation Centre for New Category Products in Southampton, which will play an important role in the company's transformation to A Better Tomorrow. The investment aligns with BTI's ambition to 'Build a Smokeless World' by generating 50% of revenue from non-combustibles by 2035.

In terms of the trailing-12-month EBITDA margin, BTI’s 48.66% is 311.8% higher than the 11.82% industry average. Likewise, its 27.11% levered FCF margin is 421.1% higher than the 5.20% industry average. Additionally, the stock’s 7.45% trailing-12-month Return on Total Capital is 11.7% higher than the industry average of 6.67%.

BTI’s revenue for the fiscal year ended December 31, 2023, increased 1.3% year-over-year to £27.28 billion ($34.72 billion). Its profit from operations increased marginally year-over-year to £12.47 billion ($15.87 billion). The company’s adjusted profit attributable to shareholders came in at £8.40 billion ($10.69 billion). Also, its EPS came in at 375.60p, representing an increase of 1.1% year-over-year.

For fiscal 2025, BTI’s revenue and EPS are expected to increase 3.3% and 5.8% year-over-year to $35.02 billion and $4.99, respectively. The stock has gained 3.5% year-to-date to close the last trading session at $30.32.

BTI’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which equates to a Buy in our proprietary rating system.

It is ranked #4 in the same industry. It has a B grade for Stability and Sentiment. Click here to see BTI's additional ratings for Growth, Value, Momentum, and Quality.

Stock #1: Vector Group Ltd. (VGR)

VGR manufactures and sells cigarettes. It operates in two segments: Tobacco and Real Estate. The company offers cigarettes under various brand names such as EAGLE 20’s, Pyramid, Montego, Grand Prix, Liggett Select, Eve, and USA, as well as partner and private label brands.

VGR’s trailing-12-month Return on Total Assets of 19.65% is 290.8% higher than the industry average of 5.03%. Likewise, the stock’s trailing-12-month levered FCF margin of 17.81% is 242.2% higher than the industry average of 5.20%. Additionally, its 1.02x trailing-12-month asset turnover ratio is 24.6% higher than the industry average of 0.82x.

For the fiscal fourth quarter that ended December 31, 2023, VGR’s total revenues came in at $360.35 million. Its adjusted EBITDA rose 5.4% over the prior-year quarter to $99.63 million. The company’s adjusted net income increased 17.5% year-over-year to $57.50 million. In addition, its adjusted EPS came in at $0.36, representing an increase of 16.1% year-over-year.

Analysts expect VGR’s EPS for the quarter ended March 31, 2024, to increase 13.6% year-over-year to $0.25. Its revenue for the quarter ending June 30, 2024, is expected to grow 4% year-over-year to $380.10 million. VGR’s shares have declined marginally over the past six months to close the last trading session at $10.55.

It’s no surprise that VGR has an overall B rating, equating to a Buy in our POWR Ratings system.

It has a B grade for Value, Sentiment, and Quality. It is ranked #2 in the Tobacco industry. Beyond what is stated above, we’ve also rated VGR for Growth, Momentum, and Stability. Get all VGR ratings here.

What To Do Next?

43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.

2024 Stock Market Outlook >

MO shares were trading at $42.20 per share on Wednesday morning, down $0.73 (-1.70%). Year-to-date, MO has gained 6.94%, versus a 9.86% rise in the benchmark S&P 500 index during the same period.

About the Author: Rashmi Kumari

Rashmi is passionate about capital markets, wealth management, and financial regulatory issues, which led her to pursue a career as an investment analyst. With a master's degree in commerce, she aspires to make complex financial matters understandable for individual investors and help them make appropriate investment decisions.


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