Should Investors Buy Big Tobacco Stocks?

The Zacks Tobacco Industry is currently in the top 16% of over 250 Zacks Industries indicating that business may start to be stronger for these companies. High Inflation may reduce overall retail spending and consumption, but alcohol and tobacco products often remain on consumers’ lists of must-haves.

Let’s see if big tobacco giants Altria Group (MO) , British American Tobacco (BTI) , and Philip Morris International (PM) can be beneficial investments going into 2023.

 

Dividends

When it comes to big tobacco stocks, their strong dividends are usually the first attribute that sticks out to investors. In this regard, Altria Group leads the way. Altria offers an impressive 8.01% dividend yield at $3.76 per share.

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Image Source: Zacks Investment Research

British American Tobacco’s annual dividend yield is second at 6.17%, with Philip Morris at 5.02%. Still, all the big tobacco stocks’ annual dividend yields are above the industry average of 4.98% and the S&P 500 ‘s 1.6% average.

Of course, dividends alone are not a reason to buy stocks. Evaluating performance and other fundamental metrics, along with growth is still necessary.

 

Recent Performance

The Zacks Tobacco Industry’s total return is +8% in 2022, to impressively outperform broader markets. With such high dividends, the total return does have a direct effect on the overall price movement in big tobacco stocks over a smaller time frame.

Year to date, BTI’s total return performance leads the way at +14% Vs. PM’s +9% and MO’s +3%. All three have outperformed the S&P 500’s -18%, with only Altria lagging the Tobacco Market’s +8.5%.

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Zacks Investment Research

Image Source: Zacks Investment Research

Over the last decade, MO’s +149% total return tops PM’s +93% and BTI’s +36%. Only BTI’’s stock is behind the Tobacco Market’s +74%. However, all three big tobacco stocks have lagged the benchmark.

Zacks Investment Research
Image Source: Zacks Investment Research

 

Valuation

Pivoting to valuation, Altria and British American Tobacco stand out. Both stocks trade under $50 a share and just above 9.7X forward earnings. This is on par with the industry average P/E of 9.6X.

Altria’s stock trades well below its decade-high of 23.5X and at a 33% discount to the median of 14.5X. Similarly, BTI trades nicely below its decade-high of 19.7X and 30% beneath its median of 14.2X.

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Zacks Investment Research


Image Source: Zacks Investment Research

In comparison, Philip Morris trades at $100 per share and 17.4X forward earnings, which is much higher than the industry average. While not appearing to offer a significant discount like its peers, PM stock is still below its decade-high of 24.9X but slightly above the median of 16.5X.

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Zacks Investment Research


Image Source: Zacks Investment Research

Growth & Outlook

Altria sticks out here too, sales are forecasted to decline just over -1% in 2022 but rebound and rise 1% in fiscal 2023 at $21.01 billion. Even better, as shown in the nearby chart, earnings are expected to rise 5% this year and jump another 4% in FY23 at $5.06 per share. Earnings estimates revisions have slightly gone down over the last 90 days.

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Zacks Investment Research


Image Source: Zacks Investment Research

For British American Tobacco, earnings are expected to drop -6% this year but climb 11% in FY23 at $4.74 a share. Earnings estimates are slightly down for BTI over the last quarter. On the top line, sales are anticipated to decline -1% in 2022 but rise 5% in FY23 to $34.49 billion.

Looking at Philip Morris, earnings are projected to drop -4% this year and decline -1% in FY23 at $5.71 per share. Earnings estimate revisions are also down for PM stock over the last 90 days. Sales are expected to be down -2% in 2022 and decline another -2% in FY23 at $29.95 billion.

Bottom Line

These three big tobacco stocks all land a Zacks Rank #3 (Hold) at the moment. With their total returns being impressively better than the broader market this year, investors might want to consider these equities for 2023 as well.

The monstrous dividends have certainly helped these stocks’ overall performance this year and they appear to be fairly valued at current levels. This combination could continue to help investors as most areas of the economy are expected to see slower growth next year.


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Disclosure: Zacks.com contains statements and statistics that have been obtained from sources believed to be reliable but are not guaranteed as to accuracy or completeness. References to any specific ...

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