Despite the talk about the so-called death of tobacco stocks, industry sales have surged 50% between 2001 and 2016, and Americans spent more at retail stores on cigarettes last year than they did on soda and beer combined, according to The Wall Street Journal. Tobacco makers have seen their operating profits surge 77% to $18.4 billion between 2006 and 2016, figures provided by Bank of America Merrill Lynch Global Research show. (For more, see also: Behind Tobacco Stocks' Recent Strength.)

Sharp Stock Improvements

Amid this period of strong profitability, the stocks of Altria Group Inc. (MO) and Reynolds American, Inc. (RAI) have surged, climbing roughly 125% and more than 200% in the last five years, according to Google Finance. These two companies sell eight out of every 10 cigarettes sold in the United States, the Journal reported. 

 

Altria and Reynolds American had 46.6% and 33.6% shares of this market in 2015, according to Wells Fargo & Co (WFC) data reported on by the Journal. The two companies have developed these dominant positions as the industry has experienced significant consolidation, a development that has helped major players generate billions in cost savings. 

Industry Outlook

As for how the industry will fare going forward, tobacco companies face significant regulatory headwinds, according to the Journal. The U.S. Food and Drug Administration may be able to prohibit the sale of menthol cigarettes—which have been shown to be more dangerous than regular cigarettes—as a result of a law passed in 2009. As a result, many industry firms have been exploring innovative approaches that provide lower health risks than traditional cigarettes. (For more, see also: 'War of Innovation' Rages in Tobacco Industry.)

The industry has room to experience additional growth in the electronic cigarette space, Paul Koger, trader and founder of Foxytrades.com, told Investopedia. He cautioned, however, that this "sub-niche" probably won't bolster the revenue of tobacco giants significantly. 

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