The tobacco industry may be reviled by some, but it has been a big winner for investors for much of its history.
Throughout the 20th century, tobacco stocks were among the best performers, benefiting from an addictive, highly profitable, recession-proof product, plus a reputation for offering generous dividend yields to investors.
In fact, according to Wharton professor Jeremy Siegel, Altria Group (NYSE:MO), domestic maker of the Marlboro brand, was the best-performing stock on the market from 1968 to 2017 when including reinvested dividends. The cigarette maker’s annualized average return was 20% during that time.
Tobacco industry overview
Today, however, tobacco companies face a new set of challenges. Smoking rates have steadily declined around the world, especially in the U.S., due to health concerns and increasing regulations. As a result, the industry has sought to pivot to next-generation products such as e-cigarettes and vaporizers, which circumvent some drawbacks of smokable cigarettes like unwanted odor and are perceived by some as better for your health. Some companies have looked beyond tobacco, partnering with cannabis businesses to capture the potential growth in an industry that bears many similarities to tobacco.
Tobacco stocks come with a number of risks, including increased regulation and declining smoking rates. Revenue and profit growth have been slow across the industry, but these stocks still appeal to investors because their profits and dividends have been so reliable, and profit margins are still strong. Investors are hopeful that next-generation products will eventually catalyze stronger growth.
A wave of consolidation in the industry has left just three major players in tobacco: Altria, Philip Morris International (NYSE:PM), and British American Tobacco (NYSE:BTI). With few competitors, these companies have been able to raise prices to generate more profits, even as cigarette sales volumes have fallen. After the big three, there are some smaller stocks investors may want to consider, including Imperial Brands (OTC:IMBBY) and Vector Group (NYSE:VGR).
Jeremy Bowman – The Motley Fool – 2023-01-23.
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