Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Brokers joke about a stock having risen far enough that it is safe for investors to have an opinion. Big Tobacco can make for some uncomfortable musings. Philip Morris International has soared 50 per cent this year while British American Tobacco is up by almost a quarter. Some of this reflects hopes for tobacco’s smoke-free future, but cigarettes are still an integral part of the industry’s investment story.
Anyone who backed Marlboro maker PMI five years ago and reinvested their dividends in the shares has tripled their money, beating the roughly 150 per cent made each from Apple and Microsoft. Backers of Imperial Brands, the manufacturer of Gauloises and Rizla, also beat the tech giants. With 118 per cent, Altria, which owns Marlboro in the US, isn’t far behind.
Performances vary, but cash is key with at least a third of the returns coming from dividends. At Imperial, payouts amount to half its returns. That doesn’t include the £4bn of share buybacks since 2022, worth almost a fifth of its market capitalisation at the point the repurchases began.
PMI’s outsized gains have put it on a breathless 20 times expected earnings — roughly equal to its peak levels seen a decade ago when vaping was the next big thing. This time it is driven by excitement over the fast-growing market for nicotine pouches and its industry leader, Zyn. The pouches, which sit between a users’ teeth and gums, deliver a buzz which supporters say improves concentration.
The question for investors is whether an addictive substance marketed in fun fruity flavours is really going to be able to grow freely, or whether it will face limits from health conscious policymakers as vaping has. Pouches are deemed a prescription drug in Australia, while France banned them outright in May.
Perhaps the apparent use of pouches by US health secretary Robert F Kennedy Jr will keep the all-important US market operating. Still, with pouch sales expected to reach $18bn globally by next year, even if PMI sold every single one, they still amount to just half its 2024 revenue.
In total three-quarters of the western Big Tobacco giants’ sales last year came from so-called combustibles as vaping sales are plateauing. Despite long-term downtrends in smokers, from a third of the global population in 2000 to a fifth in 2025, the decline in absolute numbers has been heavily cushioned by population growth, while cigarette makers have used a mix of price rises and efficiencies to maintain and even increase profits.
Smokeless products may well be Big Tobacco’s future, but it is clear where the cash is coming from, both for companies looking to deploy capital on healthier alternatives, and for their investors. Like the smell of a stubbed out Marlboro, the industry has a way of sticking around.
