Tobacco stocks continue to light up with strong performances.
Despite challenging circumstances tobacco companies faced in the past few months, tobacco stocks showed strong performances and are expected to continue on this trend.
Tobacco are known for strong and consistent cash-generating abilities and, providing great dividends to investors. In the past six months, both British American Tobacco (BATS) and Imperial Brands (IMB) outperformed the market, with returns of 27% and 9% respectively, compared to the 7% return for FTSE100 (UK100).
Similarly, Philip Morris International (PM) and Altria Group (MO) returned 4% and 14.87% respectively, while the S&P500 (US500) returned 1.5%.
According to a Capital.com analysis, tobacco has an inelastic demand that remains unchanged regardless of the economic environment and which makes tobacco companies some of the strongest income-generating sectors, increasing their ability to maintain debt payments and dividends.
Russ Mould, investment director at AJ Bell, expects Imperial and BAT to offer dividend yields of 8.5% and 6.7% respectively during 2022.
While factors such as new regulations and ESG (environmental, social, and governance) credentials may cause some investors to be uncertain about tobacco’s future, tobacco companies diversifying their business to new products such as vapes and heat-not-burn tobacco can help navigate this.
For example, in BAT’s 2021 results the company announced that revenues from new products jumped 51% while losses fell by 9% to £100m. Based on its current trajectory, BAT expects its new products division to turn a profit by 2025 and generate revenues of £5bn. Imperial announced that adjusted operating profit for the first of its fiscal year will grow by 2%, a result of reduced losses in its new product division. Philip Morris’ reduced-risk products (RRPs) saw a significant rise in revenue contribution to over 29% in 2021, compared to less than 19% in 2019.