Top Tobacco Stocks

The tobacco industry includes companies that grow, produce, and sell tobacco and related products such as cigarettes and e-cigarettes. Sometimes called sin stocks, tobacco companies are avoided by some investors, including ones who focus on socially responsible investing. The biggest tobacco companies include Philip Morris International Inc. and Altria Group Inc., both of which sell products with dominant brand names.

Over $1 billion worth of tobacco was produced in the U.S. in 2021. Earlier in the year, the U.S. Food and Drug Administration (FDA) proposed to ban both flavored cigars and menthol cigarettes. The ban could reduce the number of tobacco-related deaths each year, which currently stands at over 480,000.

Tobacco stocks as a group have outperformed the broader market. The benchmark MSCI ACWI Tobacco Index has posted a 1-year trailing total return of -1.5% compared with the Russell 1000's total return of -13.1%. These market performance numbers and all statistics in the tables below are as of Sept. 15, 2022.

Here are the top 3 tobacco stocks with the best value, fastest growth, and most momentum.

Best Value Tobacco Stocks

These are the tobacco stocks with the lowest 12-month trailing price-to-earnings (P/E) ratio. Because profits can be returned to shareholders in the form of dividends and buybacks, a low P/E ratio shows you’re paying less for each dollar of profit generated.

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• RLX Technology Inc.: RLX Technology is a China-based company focused on e-vapor products and services. The company engages in scientific research, technology, and product development, distribution, and related services. In late July the company reported that one of its subsidiaries had obtained a License for Manufacturing Enterprise from the Chinese government to make RELX branded e-vapor devices and related products. The approved manufacturing capacity is for over 15 million rechargeable devices and nearly 329 million cartridge products per year through July 31, 2023.
• Imperial Brands PLC: Imperial Brands is a U.K.-based consumer goods company. It sells cigarettes, smokeless tobaccos, papers, and related products. Its products are available throughout the world.
• Vector Group Ltd.: Vector Group is a holding company that, through its subsidiaries, manufactures and markets cigarette products. The company is also involved in real estate projects through one of its subsidiaries. Vector reported Q2 2022 earnings results on Aug. 4, including significant decline net income year-over-year (YOY) even as revenue rose. Net income was affected by an investment in the company's Montego brand.

Fastest Growing Tobacco Stocks

These are the top tobacco stocks as ranked by a growth model that scores companies based on a 50/50 weighting of their most recent quarterly YOY percentage revenue growth and their most recent quarterly YOY earnings-per-share (EPS) growth. Both sales and earnings are critical factors in the success of a company. Therefore ranking companies by only one growth metric makes a ranking susceptible to the accounting anomalies of that quarter (such as changes in tax law or restructuring costs) that may make one or the other figure unrepresentative of the business in general. Companies with EPS or revenue growth of over 2,500% have been excluded as outliers.

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• Universal Corp.: Universal operates a tobacco business and an ingredients business. Its tobacco operations include processing and shipping of leaf tobacco to manufacturers of tobacco products. Its ingredients business offers a range of plant-based ingredients. On Aug. 3 Universal announced a quarterly dividend of $0.79 per common share. The dividend is payable Nov. 7 to shareholders as of Oct. 10, 2022.
  
• Philip Morris International Inc.: Philip Morris International is a global tobacco company. It offers cigarettes as well as smokeless tobacco products, including heat-not-burn, vapor, and oral nicotine products.
• Vector Group Ltd.: See above for company description.

Tobacco Stocks with the Most Momentum

These are the tobacco stocks that had the highest total return over the last 12 months.

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• British American Tobacco PLC: British American Tobacco is a U.K.-based consumer goods company that offers tobacco and nicotine products. In addition to its traditional tobacco business, the company also offers vapor products, tobacco heating products, and modern oral products. On Sept. 6, the company announced that a year-long study indicated lower risk for users of the company's glo product compared to people who continued smoking. American Tobacco's glo is a Tobacco Heating Product (THP). It uses a device to heat, instead of burn, tobacco, often using an electronic device.
• Imperial Brands PLC: See above for company description.
• Universal Corp.: See above for company description.

Risks of Tobacco Stocks

There are many significant long-term risks associated with investing in the tobacco industry, according to the CFA Institute, a global, not-for-profit association of investment professionals that awards the Chartered Financial Analyst® designation. These include:

• Regulatory risk: There are 180 parties of the World Health Organization (WHO) Framework Convention on Tobacco Control (FCTC), the world's first legally binding health treaty. They have committed to implementing a broad range of tobacco control measures to reduce the number of new smokers and to encourage current smokers to quit, in a worldwide effort to end the tobacco epidemic. New regulations aligned with these goals are being enforced all across the globe.
• Litigation risk: There are an increasing number of major class actions against the tobacco industry, challenging the assumption that governments will automatically pay for the sweeping health costs resulting from tobacco.
• Supply chain risk: Some tobacco companies may be reliant on child labor to produce their products, which is becoming unacceptable to investors.
• Reputation risk: The tobacco industry is consistently ranked as the world's least reputable industry. As a result, individual and institutional investors increasingly avoid holding these stocks in their portfolios.

Advantages of Tobacco Stocks

Tobacco companies, which sell addictive wares, generate predictable cash flows. This can capture investor interest because it means healthy dividends that hedge against rising inflation.

However, established companies in the sector such as Philip Morris and Altria will need to make progress in "less-risky" products such as e-cigarettes and vaping to drive real gains. But this is easier said than done: Altria backed one-time e-cigarette star Juul, only to see the startup mired in lawsuits for marketing to minors.

In late September 2022, Altria said it had exercised the option to be released from its non-compete contract with Juul Labs, nearly four years after buying a 35% stake in the popular e-cigarette maker. Altria wants to terminate its non-competition obligations to Juul, give up certain rights including board designation rights, and reduce its voting power, according to a regulatory filing on Sept. 30, 2022.

Ultimately, as discussed above in the section on the risks of tobacco stocks, regulators are likely to decide the fate of the tobacco industry, so 2022 interest in the stocks may fade.

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