Tobacco has been a big business in the United States for more than a century. Whether you're interested in cigars, pipe tobacco, chewing tobacco, or traditional cigarettes, tobacco stocks have been wildly profitable as well as highly controversial.
There are only a handful of tobacco stocks that trade on major U.S. exchanges, most of which have direct ties to the domestic market for cigarettes and other tobacco products. That's not to say that foreign competitors outside the U.S. market don't have influence over the global industry, but because of the difficulty that many investors have in investing directly in stocks whose shares aren't found on the New York Stock Exchange or the Nasdaq Stock Market, the following nine tobacco stocks are more accessible for the average U.S. investor.
The 9 biggest tobacco stocks on major U.S. exchanges
10-Year Total Return
Philip Morris International (NYSE: PM)
Altria Group (NYSE: MO)
British American Tobacco (NYSE: BTI)
Universal Corp. (NYSE: UVV)
Vector Group (NYSE: VGR)
Turning Point Brands (NYSE: TPB)
Standard Diversified (NYSEMKT: SDI)
22nd Century Group (NYSEMKT: XXII)
Pyxus International (NYSE: PYX)
Data source: S&P Market Intelligence. * Since IPO or listing on a major exchange, in February 2011 for 22nd Century, May 2016 for Turning Point, and March 2018 for Standard Diversified.
Taking into account their market caps, it's clear that three of these companies are huge players in major tobacco markets. The other six are niche players that play important roles but still have a much smaller overall presence in the industry. Below, we'll look more closely at these companies to see how they fit together to help define the U.S. tobacco industry.
1. Philip Morris International
Philip Morris International leads this list, but it's an oddity in the corporate world. Although it's a U.S. corporation, Philip Morris International doesn't have a presence in the U.S. tobacco market. In fact, when it was spun off from Altria Group (NYSE: MO) in 2008, the whole idea was to concentrate international exposure within the company, leaving Altria with the domestic tobacco business.
The world's a big place, though, and that's why Philip Morris now dwarfs its former parent. The international company does business in more than 180 national markets worldwide, counting more than 150 million customers. As a result of its legacy with Altria, Philip Morris has rights to the Marlboro brand of cigarettes across the globe, and that's the most important of six major Philip Morris brands that are among the 15 largest in the world. In terms of shipment volume, the company sells the most products in South and Southeast Asia as well as in the European Union. However, Australia, Latin America, Canada, the Middle East, Africa, and Eastern Europe are all significant contributors to the tobacco giant's performance.
As important as traditional cigarettes are to Philip Morris International's business, the company has made a massive strategic shift in a new direction. Philip Morris is now committed to what it calls a smoke-free future, looking to create or market alternatives to cigarettes in an effort to find ways to enjoy tobacco without sacrificing safety.
The most important result of that initiative has been IQOS, Philip Morris' heated tobacco system. Rather than burning tobacco, IQOS raises its temperature enough for the tobacco to give off vapors without combusting. The vapor contains nicotine, so it satisfies smokers' craving for the drug in the same way that traditional cigarettes do. However, Philip Morris International has done studies that show that far fewer harmful chemicals are produced in the heating process, and it believes that the product is safer as a consequence.
Image source: Philip Morris International.
IQOS has been a hit in the early test market of Japan, and in the East Asia and Australia region, shipments of heated tobacco units for use in the IQOS system made up more than a third of Philip Morris International's total shipment volume. Worldwide, there's still a lot of ground that Philip Morris has to cover, as sales of IQOS are almost nonexistent in the key South and Southeast Asia segment and are only now starting to ramp up in the company's two European regions. Nevertheless, Philip Morris has shown a continued resolve to come up with alternatives to cigarettes like IQOS, and the big question going forward will be how well the company can make a transition from its legacy cigarette sales and keep its existing customers while attracting others from its global rivals.
2. Altria Group
Closer to home, Altria Group has the largest U.S. market share of any tobacco company, at just under 50%. Its cigarette business makes up the dominant portion of its overall sales, and the Marlboro brand is a key driver of its overall success, with a 43% market share all by itself. Other premium cigarette brands, as well as discount cigarettes and a line of cigar products, flesh out Altria's smokeable products division.
Yet Altria has an increasingly wide scope that includes a number of tobacco and non-tobacco businesses. The company's smokeless tobacco division includes well-known brands like Copenhagen and Skoal, which together control more than half of the U.S. smokeless tobacco market. Altria's Ste. Michelle Wine Estates division brings an alcohol component to the conglomerate's overall operations, although the premium wine company makes up just a tiny portion of Altria's total sales.
Image source: Altria Group.
Altria's cigarette business has been in slow decline for decades, and only the company's pricing power and financial discipline have allowed it to keep growing even in the face of falling sales volume. But it's in part because of the secular decline in smoking that Altria has made so many strategic investments to add to its business. They include the following:
- Altria had a long-term investment in beer giant SABMiller, which translated into a roughly 10% stake in Anheuser-Busch InBev following that company's purchase of SABMiller.
- More recently, Altria spent $12.8 billion to purchase a 35% stake in electronic cigarette specialist Juul.
- As marijuana gained in interest, Altria spent another $1.8 billion to buy a 45% stake in Cronos Group, a Canadian cannabis company.
In addition, Altria has an ongoing partnership with Philip Morris International with respect to alternative products. The most important consequence of that collaboration is that Altria will have the right to market the IQOS heated tobacco device in the U.S. market, paying licensing fees to Philip Morris along the way. However, the scope of the partnership is broader than just IQOS, giving both companies the ability to share in each other's research and potentially line up their development strategies even further in the years to come.
Some investors believe that the initial reason for breaking Philip Morris International and Altria Group into separate companies no longer really applies and that the two companies would be better off rejoining and taking on a truly global scope. For now, though, Altria looks poised to continue as an independent company, and it's making strategic moves that are intended to ensure its survival even as cigarette smoking continues to wane.
3. British American Tobacco
British American Tobacco is a fully integrated tobacco business with global scope. With the acquisition of Reynolds American several years ago, BAT became a global powerhouse, with a sizable market share in the U.S. as well as in key overseas markets.
BAT's historical strength has been in cigarettes, and the company claims several major brands. Historically, BAT's most popular worldwide brands were Dunhill, Kent, Lucky Strike, Pall Mall, and Rothmans. When BAT acquired Reynolds American, though, it brought the lucrative Newport and Camel brands under the corporate umbrella. In addition, Reynolds American's Natural American Spirit premium brand became part of the British American portfolio.
However, like Philip Morris International, British American has looked to transform the tobacco industry with its alternative products. These fall into several categories:
- The company's tobacco heating platform, called glo, has come out in several markets, including Japan. It competes against IQOS and has seen encouraging results in its first couple of years.
- BAT has been a pioneer in vaping products. It developed the Vype brand on its own, and the Reynolds acquisition also added Vuse to the product list.
- BAT sells moist snuff and snus for customers who want oral tobacco products, as well as nicotine-containing modern oral products that have no tobacco.
- British American offers several nicotine replacement therapies, including gum and nicotine pouches.
Given that BAT is seeing many of the same downward trends in traditional cigarette usage that its peers around the world have suffered, these alternative products will become increasingly important for the company's continuing success.
One thing that all three of these top tobacco stocks share is an attractive dividend. BAT's current yield exceeds 7%, topping Philip Morris' 5.6% yield and Altria Group's 6.5%. Those high yields signal at least some uncertainty about the future sustainability of their profits, especially in light of the major shift from cigarettes to alternative products. Nevertheless, these three giants have proven more resilient over the decades than many skeptical investors had anticipated, and that suggests that the rewards that shareholders are getting for sticking by these companies could well be worth the risk.
The three tobacco companies discussed above all specialize in marketing consumer tobacco products to their customers. Universal, however, prides itself on not manufacturing any tobacco products for direct consumer use.
Instead, Universal purchases, processes, and sells a wide variety of different types of leaf tobacco, including flue-cured, burley dark air-cured, and oriental tobacco. The company works directly with tobacco cultivators to help provide support in their agricultural pursuits, as well as offering research on best practices along with financing opportunities. The company boasts operations on five continents and expects to facilitate production of more than 5.2 billion kilograms of leaf tobacco of all types during 2019.
Universal sees its keys to success hinging on its operational practices. Having worked with large numbers of tobacco farmers, Universal can make sure that it matches up its supply of leaf tobacco with the demand needs of its clients. The company also makes sure that its tobacco supply meets regulatory compliance guidelines at prices that are competitive on the global market, while delivering products that also match up with the specifications of each customer. The fact that Universal has relationships across the globe to connect growers to tobacco product manufacturers has been a key component of its competitive advantage.
Image source: Universal.
However, the company isn't blind to the changing dynamics of the tobacco industry. Its Universal Enterprises unit offers products including pure liquid nicotine for vaping and other alternative uses, as well as services related to laboratory testing of vapor and next-generation tobacco products. The Universal Ingredients business even goes beyond tobacco, making fruit and vegetable products that match up well with the consumer trend toward natural ingredients.
Universal offers investors a compelling mix of growth and income, with a dividend yield approaching 5% and solid share-price gains that compare well against companies like Philip Morris and British American. With a strong combination of a leaf tobacco business that's likely to survive for a while and more innovative efforts to capture new opportunities, Universal's doing things the right way.
5. Vector Group
Vector Group isn't as well-known as its peers in the U.S. cigarette manufacturing business, but the company plays a significant role in the industry. As the fourth-largest cigarette manufacturer in the U.S., Vector's Liggett Group subsidiary is the company behind key discount cigarette brands like Pyramid, Grand Prix, Eve, and Eagle 20's.
Vector has done an impressive job of fostering growth. Last year, Vector's cigarette business was the only major national manufacturer to see outright increases in retail shipments, with the overall industry seeing a decline of nearly 5%. The company has pursued a strategy of emphasizing its Eagle 20's and Pyramid brands, building up brand loyalty and then making targeted price increases to maximize profit margin.
Yet at the same time, Vector has become a hybrid business. Its New Valley real estate business operates in a completely different sphere from its tobacco operations, with its takeover of the nation's third-largest residential real estate brokerage firm two years ago helping to expand the segment's reach beyond the New York metropolitan area to include Massachusetts, South Florida, Southern California, and the ski resort community of Aspen in Colorado. New Valley also has extensive assets in the Las Vegas area to go with its major presence in New York City, Miami, and Los Angeles.
For now, Vector seems committed to balancing its tobacco and real estate operations. Given the need for discount cigarette options, customers seem likely to keep buying Vector products even as overall interest in the industry wanes.
6. Turning Point Brands
Turning Point Brands hasn't been around that long as a publicly traded stock, with its IPO having happened just in 2016. But its history dates back to the late 1980s, when a leveraged buyout of the other products division of tobacco manufacturer Lorillard led to the creation of the business.
Turning Point focuses on tobacco products other than cigarettes. The company's offerings include cigarette papers and make-your-own cigar products, pipe tobacco, chewing tobacco, moist snuff, and next-generation vapor products. Turning Point has also built up a new business around cannabidiol, with the non-active ingredient in cannabis having drawn a lot of attention for potential favorable medical properties.
Image source: Turning Point Brands.
That alternative focus has proven to be a big driver of revenue for Turning Point. Top-line growth came in at 16% in 2018 and 39% in 2017. The company has also been consistently profitable in the past several years, and bottom-line growth has been steady over that timeframe.
Many investors are concerned about potential regulation of e-cigarettes and other vaping products, and that could have an outsize impact on Turning Point Brands. For now, though, demand for these products has been strong, and that could help support Turning Point's stock price into the future.
7. Standard Diversified
In particular, Standard Diversified owns a 51% stake in Turning Point Brands. Interestingly, given the current market capitalization for Turning Point, that stake more than accounts for all of Standard Diversified's enterprise value.
The conglomerate also has other interests under its holding company structure. Standard Diversified owns Pillar General, which operates New York property and casualty insurance carrier Maidstone Insurance. The company is licensed to write auto and personal property and casualty policies in 24 different states. In addition, Standard Diversified also owns Standard Outdoor, an outdoor advertising company that specializes in billboards and other ad methods outside of traditional home distribution models like television.
The lion's share of Standard Diversified's revenue comes from its proportionate share of its interest in Turning Point Brands. As long as you're comfortable that Standard Diversified's other businesses don't have an actual negative value, then its stock could be a bargain compared to owning Turning Point Brands directly.
8. 22nd Century Group
22nd Century Group takes a very different angle in working with tobacco. The plant biotechnology company's primary mission is to seek to reduce the harm caused by smoking. In particular, 22nd Century's genetic engineering and plant breeding experience has given it control over nicotine content in tobacco plants. As a result, the company has been able to grow tobacco with as little as 3% of the nicotine levels you'd find in a typical tobacco plant. At the same time, 22nd Century also markets higher-nicotine tobacco with the intent of allowing users to get a given amount of nicotine with as little tar and other harmful chemicals associated with smoking as possible.
However, the regulatory environment for 22nd Century has been in flux recently. Until the departure of U.S. Food and Drug Administration Commissioner Scott Gottlieb, 22nd Century's business model seemed completely in line with what regulators wanted: a cigarette alternative with minimal nicotine. However, with Gottlieb's having left the FDA, many now believe that the tobacco industry won't have to deal with the stringent nicotine regulation that Gottlieb had supported. That would endanger 22nd Century's prospective low-nicotine cigarette business.
22nd Century has tried to diversify somewhat, using its biotech expertise to branch into the cannabis oil realm. If that part of the business can make it easier for marijuana companies to extract CBD and other valuable cannabis products, then that could become a natural replacement for the tobacco division. Currently, though, 22nd Century's overall strategy appears to be on hold pending what happens with traditional cigarettes and nicotine levels at the FDA.
9. Pyxus International
Pyxus is the smallest company on this list, but it's picked up a following among investors -- largely because of the breadth of its business. Like Universal, Pyxus takes an agricultural approach to the tobacco industry. Moreover, Pyxus is also branching out to adjacent industries like cannabis and hemp as well.
Until 2018, Pyxus was called Alliance One International, and its primary business was in producing and distributing leaf tobacco. By working closely with tobacco farmers around the world, Alliance One was able to boost productivity and address industry problems like child labor and waste of natural resources in the growing process. The company also provides services to its contractors, offering its agricultural expertise to help solve problems and boost yield and quality. Its processing and blending facilities also help improve the quality of the end products it sells to consumer goods companies.
Under the new name, though, Pyxus now goes beyond tobacco. It has a business surrounding legal cannabis production in Canada, with its indirect subsidiary FIGR having made efforts to ramp up its production quickly in response to strong demand in the new marijuana market in the Great White North. A new joint venture is focusing on the industrial hemp opportunity in the U.S., with the recent passage of the U.S. farm bill giving Canadian companies an entry southward to the much larger American market through the production of CBD products under the Korent name. Various e-liquid businesses offer multiple ways to profit from the rise of vaping as well.
Pyxus is still small, and its revenue from leaf tobacco has been falling over the years. If cannabis and related markets can bring it back from the brink, however, then Pyxus shareholders might end up getting the last laugh.
Who got left out?
Not making the list are several big global players whose shares aren't listed on major U.S. exchanges. They include the following:
- ITC Limited, an Indian producer with a market capitalization of nearly $50 billion.
- Japan Tobacco, which is the leading domestic producer in Japan with a market cap exceeding $40 billion.
- Imperial Brands, which has even taken a role in the U.S. tobacco industry as well as serving overseas markets.
- A host of additional players in nations like Indonesia, Korea, Sweden, Pakistan, and several other key countries.
For those seeking diversification in a tobacco stock portfolio, the first three companies above offer different views of the same markets that you'll find Philip Morris International and British American Tobacco trying to tap into. The only challenge is purchasing those stocks, as you'll have to go directly to foreign markets or find over-the-counter opportunities in order to obtain shares.
For smaller players internationally, the difficulties in obtaining shares can be even greater. For the most part, U.S. investors have enough good choices among more readily available and investable stocks that they shouldn't have to go too far afield. However, if you're set on a particular company, then you might need to jump through hoops in order to get the exposure you want.
A few players in a big industry
There aren't very many major tobacco companies available on U.S. markets, as consolidation across the industry has concentrated control of the tobacco business into the hands of a small number of companies. Nevertheless, the companies that remain have seen good investment results on the whole, and even with the challenges that face the tobacco industry, the prospects for those businesses remain favorable. Meanwhile, up-and-coming companies within tobacco and in adjacent industries offer their own takes on the future of the industry, and it'll be interesting to see to what extent tobacco and cannabis start to merge together in the not-too-distant future.
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