Despite falling smoking rates and heightened government regulation, major cigarette and tobacco players have seen their stocks peak in recent months.

New York City-based Philip Morris International Inc. (PM) has seen its stock lift about 25% over the course of 2017. Shares of Reynolds American Inc. (RAI) have gained 30% over the most recent six-month period after announcing its agreement to tie up with London-based British American Tobacco Inc. (BTI). Richmond, Va.-based Altria Group Inc.’s (MO) stock is also up an approximate 19% over the past six months.

Bulls Energized on Solid Earnings, Upcoming Megadeals

Significant capital appreciation and dividend income of the leading tobacco stocks have generated strong double-digit annual returns for shareholders. All the while, on the surface, the industry landscape seems to be working against the proliferation of tobacco products, as wellness initiatives disrupt traditional industries with changing consumer demands and anti-smoking campaigns. (See also: Business Groups Increasingly Turn Against Tobacco.)

When investors look behind the smoky situation, however, it’s evident that a combination of factors including solid quarterly results, upcoming megadeals​, further M&A speculation and a bullish outlook on alternative smoking products from analysts and company management alike have boosted traditional tobacco companies. Further, macroeconomic factors such as an improving employment situation and lifted consumer confidence have propelled the industry forward. Adding to that: tobacco is addictive. (See also: 'War of Innovation' Rages in Tobacco Industry.)

M&A Speculation Continues

The upcoming Reynolds-BAT deal announced in January 2017, largely driven by the British company’s initiative to gain prominence in the booming e-cigarette and “reduced risk” alternative tobacco products space, has resulted in further M&A speculation. Amidst heightened competitive pressure, analysts have indicated Philip Morris could look to consolidate power and join forces with Altria Group, which spun off from Philip Morris International in 2008.

Overall, while tobacco leaders are clearly safeguarding against declining smoking rates in developed countries, they’re likely to continue generating heaps of cash from a growing segment of consumers in the developing world, in low- and middle-income countries, representing 80% of 1 billion smokers worldwide, according to the World Health Organization.

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