The United States saw a rising number of smokers in 2020 because of COVID-19-pandemic-led stress and depression. In recent years, the number of smokers has declined  by 3-4% per year. To mitigate the health implications amid the rising demand, tobacco companies have been researching and launching next-generation, low-risk tobacco products, including moist snuff or e-vapors. As the harmful effects of smoking are reduced in the future by these next-generation products, the number of smokers is expected to rise globally. The global tobacco market size is likely to expand at a CAGR of 1.8% over the next seven years to generate $1.07 trillion in revenue  by 2028.

Also, tobacco companies are collaborating with others to secure U.S. Food and Drug Association’s (FDA) approvals for their product pipelines. As a result, the next-generation tobacco products are likely to generate significant revenues for these companies. Furthermore, to attract investors, many tobacco companies are increasing their dividend yields.

Thus, we think high-yield tobacco companies Altria Group, Inc. (MO), Imperial Brands PLC (IMBBY), and Schweitzer-Mauduit International, Inc. (SWM) are ideal investment bets now.

Altria Group, Inc. (MO)

MO manufactures and sells smokable products, oral tobacco products, and wine in the United States. The company’s popular brands are Marlboro cigarettes, Black & Mild cigars, and moist smokeless tobacco products under the Copenhagen, Skoal, Red Seal, and Husky brands. Also, MO provides finance leasing services, primarily in transportation, power generation, real estate, and manufacturing equipment industries. The company sells its tobacco products primarily to wholesalers, including distributors; and large retail organizations, such as chain stores.

In February, MO declared a quarterly dividend of $0.86, payable on April 30, 2021. Philip Morris USA, an MO subsidiary, developed  IQOS 3, a tobacco heating system device, with three HeatStick variants, under an exclusive agreement with Philip Morris International, Inc. (PM). The U.S. Food and Drug Administration (FDA) has authorized its sale in December.

MO’s net revenues increased 4.9% year-over-year to $6.30 billion for the fourth quarter, ended December 31, 2020. Its revenue from its oral tobacco products segment increased 4.5% year-over-year to $2.53 billion. MO’s gross profit has increased 2% year-over-year to $3.15 billion. The company’s operating income was $2.58 billion, which represented a 7.5% improvement year-over-year. Cash and cash equivalents came in at $4.95 billion as of December 31, 2020, up 133.6% year-over-year.

A consensus EPS estimate of $1.17 for the current quarter, ending June 30, 2021, represents a 7.3% improvement year-over-year. MO surpassed consensus EPS estimates in three of the trailing four quarters. The consensus revenue estimate of $5.37 billion for the current quarter represents a 6.6% rise on a year-over-year basis.

The stock has gained 26.5% over the past year and 28.5% over the past nine months. It ended yesterday’s trading session at $51.75. MO has distributed $3.44 in dividends annually, which translates to a dividend yield of 6.7%.

MO’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which equates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

The stock has an A grade for Quality, and a B grade for Momentum. We have also graded MO for Value, Growth, Stability, and Sentiment. Click here to access all MO’s ratings.

MO is ranked #5 of 11 stocks in the A-rated Tobacco industry.

Imperial Brands PLC (IMBBY)

IMBBY manufactures and sells a range of cigarettes, fine cut and smokeless tobaccos, papers, and next generation product (NGP) portfolio. The company operates through four segments: Europe, the Americas, Africa, Asia & Australasia (AAA), and Distribution. It also provides logistics services that include the distribution of its products and services. Its top brands include West, Davidoff, John Player Special, and Gauloises.

In March, IMBBY started to increase its tobacco market share in its top five markets. Its  Gauloises and Winston brands seem to capitalize on higher tobacco prices and significantly reduced its losses in vaping. In  February, IMBBY was  recognized as a global leader for engaging with its suppliers on reducing carbon emissions and tackling climate change.

IMBBY’s revenue from its  Africa, Asia and Australasia segment for the full year ended September 30, 2020 was £1.94 billion, which represents a 2.5% year-over-year rise. This was driven primarily by price gains in its Australian segment, which increased that segment’s profits by 32.7% year-over-year. The company’s net cash generated from operating activities increased 24.5% year-over-year to £4.03 billion.

Analysts expect IMBBY’s revenue to improve 1.4% year-over-year for its fiscal year 2023 to $12.26 billion. Analysts expect the stock’s EPS to grow at 8.1% per annum over the next five years.

The stock has distributed $1.84 in dividends annually, which translates to a dividend yield of 8.6%. The stock has gained 22.7% over the past six months and closed yesterday’s trading session at $21.50.

IMBBY’s POWR Ratings reflect this promising outlook. The stock has an overall B rating, which equates to Buy in our POWR Ratings system.

The stock has a B grade for Value, Momentum, Stability, and Growth. In addition to the POWR Ratings grades we’ve just highlighted, one can see IMBBY’s ratings for Quality and Sentiment here.

IMBBY is ranked #6 in the same industry.

Schweitzer-Mauduit International, Inc. (SWM)

SWM provides engineered solutions and advanced materials for various industries worldwide. The company operates through two segments—Advanced Materials & Structures and Engineered Papers. Through its Engineered Papers (EP) segment, SWM  serves primarily the tobacco industry with its manufacture and sale of paper and reconstituted tobacco products.

Last Month, SWM’s made a cash offer for the acquisition of Scapa, a U.K.-based innovation, design and manufacturing solution provider. In February, SWM entered an amendment to its existing credit agreement to add a new $350 million Term Loan B facility with a seven-year maturity.

For the fourth quarter, ended December 31, 2020, SWM’s net sales increased 17.1% year-over-year to $279.40 million. The company’s gross profit has increased 12.1% year-over-year to $79.5 million. Its adjusted operating profit of $35.80 million for the fourth quarter represents an improvement of 13.7% year-over-year. Cash provided by operating activities came in at $54.10 million, up 30.7% year-over-year.

Analysts expect SWM’s EPS for the current quarter, ending June 30, 2021, to be $0.95, up 31.9% year-over-year. It surpassed the Street’s EPS estimates in three out of trailing four quarters. For the next quarter, analysts expect SWM’s revenue to be $1.09 billion, representing a 1.1% rise from the prior-year period. The company’s EPS is expected to grow at 5% per annum over the next five years.

The stock has paid $1.76 in dividends annually, which translates to a dividend yield of 3.6%. It has gained 57.1% over the past nine months and closed yesterday’s trading session at $48.85.

It’s no surprise that SWM has an overall A rating, which equates to Strong Buy in our POWR Ratings system. The stock has a B grade for Stability, Sentiment, Value, and Momentum. Click here to see the additional ratings for SWM (Growth and Quality).

SWM is ranked #2 in the same industry.

MO shares were trading at $51.17 per share on Tuesday afternoon, down $0.58 (-1.12%). Year-to-date, MO has gained 26.97%, versus a 10.79% rise in the benchmark S&P 500 index during the same period.

About the Author: Sweta Vijayan

Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market. More...

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