Tobacco stocks recently took a dive on news of the latest Food and Drug Administration (FDA) hire. Investors sold these stocks off as Health and Human Services (HHS) secretary Alex Azar named National Cancer Institute director Ned Sharpless as the interim head of the FDA.
Tobacco stocks had initially risen upon news of the resignation of outgoing FDA head Scott Gottlieb. Gottlieb had wanted to lower nicotine levels in cigarettes and ban menthol cigarettes. Now, with Dr. Sharpless in charge, these initiatives could continue to move forward.
However, investors should remember that the Surgeon General’s report outlining the dangers of smoking came out in 1964. Despite decreased use of the product in the U.S., tobacco stocks have steadily risen in the 55 years since the release of that report. Moreover, hemp legalization, as well as the full legal status of cannabis in several U.S. states could become a source for profit growth.
Still, no matter the length of Dr. Sharpless’s tenure at the FDA, all tobacco stocks will face regulatory challenges. However, by adapting to the regulatory environment and finding new segments of growth, these tobacco stocks can maintain generous dividends and continue offering returns:
As the owner of the popular Marlboro brand, Altria (NYSE:MO) remains one of the more profitable tobacco stocks. Like its peers, MO stock fell upon the news from the FDA. Given the background of Dr. Sharpless, one has to assume he will continue Dr. Gottlieb’s anti-tobacco initiatives.
However, I think this will serve as a non-event for MO stock. The equity recovered its post-announcement losses in a day. In my view, that recovery signals that the hire of Dr. Sharpless means the status quo, not further bad news.
Profit estimates for this year have fallen from $4.32 per share 90 days ago to $4.20 per share today. However, that is old news. Investors also know that profit growth will average 6.91% per year, over the next five years. While this represents a slowdown from the 11.51% per year growth rate over the previous five years, investors have also priced that news into MO.
Meanwhile, the company continues to build new sources of revenue. Altria invested $12.8 billion in electronic cigarette maker Juul. Moreover, with the company’s $1.8 billion investment in Cronos (NASDAQ:CRON), cannabis can also serve as a new source of revenue.
Even if anti-tobacco initiatives harm their traditional business, Altria appears to keep increasing profits and payouts. The dividend yield currently stands at about 5.7%. This payout has risen for ten straight years. Moreover, investors who have held the stock since 2003 and reinvested the dividends now earn back their original investment every year in dividends alone. Hence, while the tenure of Dr. Sharpless could affect stock price growth, MO stock is still likely to continue to deliver returns.
Imperial Brands (IMBBY)
Those wanting tobacco stocks free from a harsh U.S. regulatory environment pay turn to Imperial Brands (OTCMKTS:IMBBY). This seller of the popular Kool and Winston brands sells tobacco products in more than 160 countries. It also leads the world in fine-cut tobacco products and serves as the leading seller of cigars in several of its markets.
The U.S. accounted for about 21.7% of its revenue in 2018. Although this leaves most of the business outside the confines of the FDA regulation, IMBBY stock has suffered like most tobacco stocks as consumers around the world have increasingly turned away from tobacco.
Interestingly, the company itself has followed this anti-tobacco trend. In 2016, IMBBY changed its name from Imperial Tobacco to Imperial Brands to reflect all of its lines of business. Like its major peers, Imperial has moved into e-cigarettes. IMBBY has also entered the cannabis business. In 2018, its subsidiary Imperial Brands Ventures invested in Oxford Cannabinoid. This gave Imperial a stake in the market of cannabis-based medicines.
Moreover, Imperial has outperformed its peers in one area—dividends. This year’s payout of $3.44 per share takes the yield to about 10%. Although the company cut this payout in 2016, it has risen over time.
As an equity, IMBBY stock may not see big gains in the near term as slowing tobacco use and FDA regulation weigh on the company. However, the company now seeks to revive its fortunes in cannabis and e-cigarettes. This should leave Imperial Brands well-positioned to continue its generous payouts.
Philip Morris International (PM)
Of the global tobacco stocks, none stand in a better position to avoid the FDA than Philip Morris (NYSE:PM). This company once acted as the offshore arm of Altria and became a separate firm in 2008. Other than possible issues related to its New York City base of operations, its offshore markets leave the FDA with little power to regulate PM.
Philip Morris retains the rights to sell Marlboro and other brands outside of the U.S. However, investors should think of PM stock as more than “non-U.S. Altria.” It has also separated itself from other tobacco stocks by stating a desire to leave the tobacco business.
The company has invested heavily in its iQOS e-cigarette brand. The company hopes iQOS will satisfy both consumers and regulators to the point that it replaces tobacco. At least so far, PM has also chosen not to enter the cannabis space. CEO Andre Calantzopoulos cited his hopes for iQOS as one reason why.
Still, PM stock has behaved like a tobacco equity. Like its peers, it has fallen over the last year. Moreover, it has retained the dividend philosophy of its former parent. PM has increased its payout every year since its founding. This year’s dividend of $4.56 per share yields about 5.1%. Predicted growth rates of 5.9% this year and 8.5% in 2020 should help the company fund further payout hikes.
It remains unclear whether its iQOS-focused strategy will pay off in the long run. However, the non-U.S. focus protects PM stock from most FDA scrutiny. Moreover, its market positioning and generous dividend should make Philip Morris a long-term winner for income-focused investors.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
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