Tobacco stocks rally could run out quickly

Tobacco stocks are hot again, but investors’ taste for nicotine may not last.

In tough markets this year, U.S.-listed shares of cigarette makers Philip Morris International and Altria rose 14% and 6%, respectively, making tobacco the fourth-biggest gainer among the more than 60 sub-markets. sectors of the S&P 500 index. London-listed Lucky Strike owner British American Tobacco fared even better, up more than a fifth.

It’s a welcome change for the industry, whose shares have underperformed since the end of 2017 on worries about tighter government controls on tobacco and investors excluding cigarette makers for reasons. ethics. The United Nations Tobacco-Free Finance Pledge has been signed by companies managing $12.2 trillion, or about 10% of the assets overseen by the world’s top 500 asset managers.

Companies published strong results for the year as a whole 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 of the year, Vuse broke even for the first time in the US market.

Philip Morris, which sells Marlboro cigarettes outside the United States, said net revenue from “reduced risk products” like its IQOS heated tobacco sticks accounted for 31% of the group’s total in the last quarter of 2021. Altria, which sells Marlboro in the U.S., hasn’t made as much headway in building smoke-free brands since its disastrous bet on e-cigarette maker JUUL Labs in 2018. However, he pointed out that recent weak volumes of cigarettes in the United States is consistent with long-term averages when examined over a two-year period.

While the latest numbers are broadly encouraging, the recent rise in tobacco stocks is likely due to hedge funds shifting from growth stocks to value stocks rather than an influx of long-term investors, Jefferies analysts say. . Funds may look 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 to a 7% drop in the broader blue chip index. Tobacco companies generate a lot of cash and pay for it: even after its recent takeover, BAT’s dividend yield is 6.5%.

For the revaluation of tobacco stocks to continue, investors would need to be confident that regulatory threats are easing or that the benefits of smokeless products are rapidly replacing those of lucrative traditional cigarettes. Here, the signs are mixed.

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 United States, is reviewing the way it taxes all tobacco products. If he raises taxes on smokeless products, tobacco companies might have a harder time persuading smokers to switch or make a big profit off them if they do. The US Food and Drug Administration wants to ban menthol cigarettes, a move that would hit Newport owner BAT hard.

The surge in tobacco stocks is a sign that investors view them as a safe haven in a rising interest rate environment. This shouldn’t be taken as a vote of confidence that the industry’s problems are going away.

This story was published from a news agency feed with no text edits

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