Tobacco stocks are back in fashion, but investors’ taste for nicotine may not last.
In this year’s shaky markets, shares of US-listed cigarette makers.
are up 14% and 6%, respectively, making tobacco the fourth biggest gainer among the more than 60 subsectors of the S&P 500 Index. Owner of London-listed Lucky Strike
it has fared even better, more than a fifth.
It’s a welcome change for the industry, whose shares have underperformed since late 2017 due to concerns about tighter government controls on tobacco and investors dumping cigarette companies on ethical grounds. The United Nations Tobacco-Free Financing Pledge has been signed by companies managing $12.2 trillion, equivalent to around 10% of the assets overseen by the world’s top 500 asset managers.
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Companies reported strong results for the full year this week. On Friday, BAT said sales of its smokeless products like Vuse e-cigarettes grew more than 50% in 2021. In the second half, Vuse broke even for the first time in the US market.
Philip Morris, which sells Marlboro cigarettes outside the US, said net revenue from “reduced-risk products” such as its IQOS heated tobacco sticks made up 31% of the group’s total in the last quarter of 2021. Altria, which sells Marlboros in the US, has not made as much progress in creating smoke-free brands since its disastrous 2018 bid for e-cigarette maker JUUL Labs. However, it noted that recent weakness in volumes of US cigarettes is in line with long-term averages when viewed over a two-year period.
Although the latest numbers were broadly encouraging, the recent surge in tobacco stocks is likely due to hedge funds switching from growth stocks to value stocks rather than an influx of long-term investors, analysts at Jefferies say. . The funds may be looking for companies that pay generous dividends as a hedge against inflation. The S&P 500 High Dividend Index is up 2.4% this year, compared with a 7% drop in the broader blue-chip index. tobacco companies generate a lot of cash and pay it: Even after its recent rally, BAT’s dividend yield is 6.5%.
For the appreciation in tobacco stocks to continue, investors would need to be convinced that regulatory threats are abating, or that profits from smokeless products are rapidly replacing those from lucrative traditional cigarettes. Here, the signs mix.
PMI and BAT are making progress in developing less risky products like e-cigarettes. However, the European Union, where smoking rates are much higher than in the US, is reviewing how it taxes all tobacco products. If you raise taxes on smokeless products, it could be harder for tobacco companies to persuade smokers to switch, or make big profits if they do. The US Food and Drug Administration wants to ban menthol cigarettes, a move that would hit Newport-owned BAT hard.
The rise in tobacco stocks is a sign that investors see them as a safe haven amid rising interest rates. It should not be taken as a vote of confidence that the industry’s problems will go away.
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