Tobacco stocks offer a unique combination of traits for investors to consider. The tobacco business has been a cash cow for its top companies, and the biggest players in the industry have been able to pay extremely attractive dividends while still offering share-price appreciation over the long haul. However, many people still feel uncomfortable investing in the tobacco industry, with concerns about the health effects of tobacco products continuing to draw the attention of consumer advocates and government regulators.

As consumer tastes change, even mainstream tobacco companies have turned over a new leaf with respect to their business models. Many are looking seriously at phasing out traditional tobacco products, seeking to replace them with alternatives that they hope will have fewer adverse health effects. The drive toward lower-risk products in the tobacco industry has opened up the field to a set of new players, many of which have already made names for themselves. Moreover, the rise of the legal cannabis industry has created opportunities for tobacco companies to play a larger role in an adjacent business segment, and top tobacco businesses have joined forces with rising marijuana producers to leverage their expertise in the new, fast-growing cannabis industry.

Nine cigarettes as seen from open end.

Image source: Getty Images.

With that in mind, the five tobacco stocks below have the best prospects for dividend income, long-term capital appreciation, and fundamental success over the long run.

5 Top Tobacco Stocks

Stock

Headquarters

British American Tobacco (NYSE:BTI)

London

Altria Group (NYSE:MO)

Richmond, Va.

Philip Morris International (NYSE:PM)

New York City

Turning Point Brands (NYSE:TPB)

Louisville, Ky.

Universal Corp. (NYSE:UVV)

Richmond, Va.

Source: Yahoo! Finance.

Let's look more closely at these companies to see why they are such good prospects for succeess for long-term investors.

1. British American Tobacco

If you can only buy a single tobacco stock for your portfolio, then you should buy British American Tobacco. The reason: BAT gives you global exposure to the tobacco industry, including the key U.S. tobacco market as well as the lucrative opportunities you'll find in international markets around the world.

BAT's path to its current status as a global powerhouse illustrates its long-range strategic vision. While it was founded with tobacco as its core business, the formation of the conglomerate BAT Industries in the 1970s allowed the business to diversify itself gradually to become a broader-based consumer-products company. Cosmetics, food products, and paper were added to BAT Industries' business portfolio in the 1960s, and the company also became a giant in the financial services business.

But in the end, BAT Industries decided to separate out its tobacco business from its other holdings, divesting its financial services business in 1998 and then making British American Tobacco a separately traded company on the London Stock Exchange. The acquisition of American Tobacco in 1994 added Lucky Strike and Pall Mall to its list of brands, and a later merger with Rothmans International in 1999 gave the company its prestigious Dunhill brand. When its Brown & Williamson subsidiary merged with RJ Reynolds Tobacco in 2004, British American took a 42% stake in the newly formed Reynolds American.

Glass bust with a cigarette in its mouth.

Image source: BAT.

That stake in Reynolds has been integral to British American's global tobacco strategy. When Reynolds American bought Lorillard in 2014, BAT agreed to make a massive $4.7 billion investment in order to sustain its 42% stake in the combined company. The move added key new brands to Reynolds American's lineup, most notably the Newport brand, which had dominated the menthol cigarette category. Just a few years later, BAT proposed to buy out the 58% of Reynolds American that it didn't already own, and that acquisition was completed in mid-2017.

Now, BAT has exposure across the planet. The U.S. tobacco market represented almost 40% of its total revenue in 2018, but its Europe segment, its North Africa, Asia-Pacific and Middle East segment, and its Americas and sub-saharan Africa segments all contributed roughly 15% to 25% of revenue as well. The U.S. market boasts better operating margin levels than its other operations, but growth opportunities are arguably more favorable for the core tobacco business internationally.

Like many players in the tobacco space nowadays, British American Tobacco is looking to get more deeply into areas other than cigarettes as well. The purchase of Reynolds American gave BAT the Vuse platform of e-cigarettes, adding to the company's existing Vype brand. Outside of e-cigarettes, BAT has worked on oral tobacco pouches that aim to offer a different experience to customers compared to traditional chewing tobacco. Nicotine replacement therapy products have taken on positive momentum for the company as well, and BAT made entered into the heated tobacco segment with its global platform.

A key element making BAT a top stock right now is that it is now a bargain compared with its past prices. With shares off 40% over the past five years as of mid-2019, the tobacco giant's stock has suffered even in the aftermath of its merger with Reynolds American, largely because of the continued decline in smoking and the strength of the U.S. dollar in comparison with many key currencies abroad. That's also helped boost its dividend yield above the levels of those boasted by peers Altria and Philip Morris International, which gives income investors something to be happy about as well. Yield levels as of mid-2019 were starting to approach the highs that tobacco investors saw in the early 2000s. Attractive valuations and solid dividend income combine to give BAT a lot of favorable prospects, and that makes the global tobacco giant worth a close look even despite the ongoing existential threats to its core cigarette business.

2. Altria Group

If you want a tobacco stock that's a pure play on the U.S. market, then Altria Group is the obvious pick. The company has a bigger market share in the U.S. than any other company, with its iconic Marlboro brand driving the vast majority of Altria's overall cigarette sales.

Until roughly a decade ago, Altria would have matched up well to British American Tobacco's current form. The company had both domestic and international divisions, spanning the globe with its prowess in selling cigarettes and other tobacco products. But in the late 2000s, Altria decided to spin off its international operations into Philip Morris International. At the time, the idea was to make Philip Morris International the more desirable company from an investment standpoint, because most tobacco investors saw dramatically more regulatory risk for U.S. tobacco companies than for their overseas counterparts. As you'll see below, that didn't entirely turn out to be the case, but it does explain the circumstances that led to the split in the first place.

Altria's business consists of four main parts:

  • The smokeable products division, which includes both cigarettes and cigars and provides the lion's share of Altria's overall revenue. The company's John Middleton subsidiary specializes in cigars under the Black & Mild brand name, and the more recent acquisition of Nat Sherman added more depth to both the cigar and premium cigarette operations.
  • The smokeless products division, which has two top names in chewing tobacco: Copenhagen and Skoal.
  • Ste. Michelle Wine Estates, which is a wholly owned wine business.
  • Strategic investments involving minority stakes in several outside companies.

It's this final category that distinguishes Altria the most from its peers. The company has had sizable investments in the beer industry for years, and a series of transactions has led to Altria owning about 10% of the stock of Anheuser-Busch InBev (NYSE:BUD). Many investors connect tobacco and alcohol as having similar investment characteristics, making Altria potentially worthy of the "sin stock" moniker.

Icons of various Altria brands and images of tobacco and related products.

Image source: Altria Group.

Altria has used strategic investments to identify opportunities in related and adjacent industries. After trying to come up with its own electronic cigarettes as an alternative to traditional cigarettes, Altria decided instead to spend a whopping $12.8 billion for a 35% stake in industry leader Juul Labs. With investor interest on the rise in companies that grow marijuana, Altria also bought a 45% stake in cannabis cultivator Cronos Group (NASDAQ:CRON), at a cost of $1.8 billion.

Altria has another ace up its sleeve that could produce substantial profits in the future. Even though Altria and Philip Morris International are now separate companies, they've still retained a collaborative partnership in certain areas, especially with respect to potential reduced-risk cigarette alternatives. As a result of that collaboration, Altria will have the exclusive right to market and sell Philip Morris International's IQOS heated-tobacco system once it becomes available on the U.S. market. IQOS has already performed well in many foreign markets, and Altria's management is hopeful that it can be equally lucrative for American customers, providing them with another alternative to consider in addition to the e-cigarettes that Juul has sold so successfully.

One big question about Altria involves its relationship with Philip Morris International. In August 2019, the company revealed that it's in talks with PMI about a possible merger. If those talks produce results, then a combined Altria-PMI could look a lot like British American Tobacco with newly global scope. However, there's a lot of uncertainty about whether the two companies will agree to terms and what obstacles might exist to getting a deal done.

By maintaining brand loyalty and pricing power, Altria has been able to boost revenue and profits even as traditional cigarette volumes drop. With an above-average dividend yield and an earnings multiple that's cheaper than the broader market as of mid-2019, Altria has a lot to offer investors looking for both current income and growth prospects.

3. Philip Morris International

If you want a tobacco stock that has absolutely no exposure to the U.S. market, then Philip Morris International is an obvious choice. When it was spun off from Altria Group, Philip Morris International got only the non-U.S. part of the combined company's tobacco business, providing it with opportunities to promote growth around the world.

At first, many investors believed that Philip Morris International would have far better prospects than the surviving U.S. business owned by Altria. At the time, the U.S. had already ramped up regulatory efforts on tobacco products, while many foreign governments were far more lenient with respect to how they sought to control tobacco. Over the past dozen years, however, foreign regulators have taken cues from the U.S., and regulatory efforts have gained a lot of momentum worldwide. This has left Philip Morris International dealing with many of the same headaches that U.S.-focused tobacco companies have struggled with since before the turn of the millennium.

That's not to say that Philip Morris International hasn't built an impressive business. The company boasts more than 150 million consumers worldwide, with operations in more than 180 markets. Philip Morris directly employs 77,000 people, and the wider network of tobacco farming, distribution, and marketing makes the company's impact on the economies in which it operates quite significant.

In fact, it's because of the size of Philip Morris International's operations that its current strategic vision for the company is so surprising. Unlike many of its peers, Philip Morris International has embraced the idea that the cigarette industry as we know it is on borrowed time. CEO Andre Calantzopoulos and his team have said repeatedly over the past several years that their mission is to replace traditional cigarettes with smoke-free products as quickly as possible. The company points to its team of more than 400 scientists, engineers, and technicians doing research to find smoke-free products that will meet customers' needs while avoiding the health effects that traditional smoking brings.

Philip Morris International's transformation will take time to accomplish, though. Given the power of the Marlboro brand -- as well as several other key cigarette brands that resonate with customers in particular areas of the world -- Philip Morris still gets the vast majority of its revenue from conventional tobacco products. The customers who smoke Philip Morris International's cigarettes represent a cross-section of the entire smoking world, taking advantage of the solid mix of premium and mid-price products the company sells.

Some skeptics might think that the odds of Philip Morris International actually making progress toward its goal would be minimal, but the company already has a big success story in IQOS. This alternative to traditional cigarettes involves using an appliance that heats up specially formulated packets of tobacco. The heating process creates a nicotine-containing vapor that the user can then breathe in. According to the research that Philip Morris International has done, IQOS offers many of the same qualities of taste that smokers get from regular cigarettes, but the heating process substantially reduces the amount of harmful chemicals that the regular burning of tobacco in traditional cigarettes produces.

So far, IQOS has done extremely well in several of the markets in which Philip Morris International chose to test out the technology. At the same time, the company is also continuing to explore other alternatives, with the intent of offering customers a range of solutions they can consider that would all have advantages over traditional cigarettes. Given the variety of local consumer preferences, this diversified approach offers the best chance of overall success for Philip Morris International.

As mentioned above, PMI recently started looking at the possibility of acquiring Altria to reunite with its former parent. Such a combination would add new assets to the international tobacco company's arsenal, including Juul's e-cigarettes and marijuana-related products from Cronos. However, a deal would take away Philip Morris International's status as a pure play on foreign tobacco.

For investors seeking the growth potential that emerging economic powers offer, Philip Morris International offers an easy way to profit from the products that aspiring new middle-class residents of foreign countries often choose to buy in order to confirm their new and improved socioeconomic status.

4. Turning Point Brands

Many tobacco investors have been nervous about the long-term downturn in cigarette sales over the past several decades. The secular decline in traditional cigarette smoking has been problematic for the biggest companies in the industry, forcing the strategic shifts we've seen from top producers. Yet it's also opened up new niches for enterprising young companies to tap into as they attempt to stand out from the crowd.

Turning Point Brands has been around for more than 30 years, having come about as part of a leveraged buyout from a division of Lorillard. Shareholders have only had a few years to invest in the stock following its 2016 IPO, which generated considerable excitement about the company.

The reason for that excitement has to do with the particular niches the company's management has chosen to pursue. Turning Point got its start by specializing in tobacco products other than mainstream cigarettes and cigars. They include the following:

  • The Zig-Zag brand, which caters to customers who want to have a more hands-on experience with their tobacco. Consumers can buy cigarette papers to roll their own cigarettes, or for those who prefer cigars, the company's cigar wraps give customers the chance to build their own cigars to their specific tastes.
  • The Red Cap brand, which offers pipe smokers a premium pipe tobacco.
  • The Stoker's brand, which is Turning Point's leading offering in the moist snuff category.
  • Several brands of chewing tobacco, including Beechnut, Troph, Durango, Big Mountain, Havana Blossom, and Appalachia.

In addition to products that use regular tobacco, Turning Point has embraced the rising trend toward vaporization. The company has worked hard to expand its capacity to serve the growing retail channels that distribute and sell electronic vapor products, dramatically expanding its product lines of vaporizers and e-liquids for use in vaping. VaporBeast and Vapor Shark have been important contributors to Turning Point's overall performance, and the acquisitions of International Vapor Group and Vapor Supply have given the company an e-commerce presence in marketing its products. With storefronts under the Vapor Shark and Vaporfi names, Turning Point is building a network that consumers can identify with and build loyalty to over the long haul.

Finally, Turning Point has identified the potential involved in the budding cannabis industry, and its Nu-X Ventures business unit is looking closely at opportunities in that rapidly emerging area. The goal here is to combine Turning Point's experience with delivery methods for e-liquids with the potential benefits of cannabis-derived CBD, creating products that will resonate with wellness-minded customers. Already, the company's Nu-X line offers liquid CBD in several flavors, while the Riptide line combines a vaping stick with various e-liquid products.

Turning Point's small size and focused business model provide it with far greater growth opportunities than you'll find with larger companies. After a revenue jump of almost 40% in 2017, sales growth has slowed somewhat, but the roughly 15% top-line gains  that Turning Point enjoyed as of mid-2019 still dramatically outpace those seen by traditional tobacco giants. Unlike many companies that have tried to jump into the cannabis industry, Turning Point makes money and has done so for several years now. Growing earnings reflect the success the company has had.

That said, Turning Point's business isn't without risk. If regulators turn their attention to cigarette alternatives, then Turning Point could find itself having to pivot quickly, and cannabis has its own legal and regulatory challenges. However, the nature of Turning Point's exposure differs from that of its larger industry peers, and that's worth considering for anyone building a diversified tobacco stock portfolio.

5. Universal

Sometimes, the best company to turn to in an industry is the one that provides the raw materials other companies use to make their final products. Universal has adopted this business model, choosing not to provide any finished tobacco products to consumers.

Instead, Universal concentrates on growing and processing the leaf tobacco that goes into the cigarettes, cigars, and other tobacco products that its clients sell to their end users. Universal counts the largest companies in the cigarette business among its top clients, including Altria, British American, and Philip Morris International. BAT and Philip Morris each account for more than 10% of Universal's overall revenue, as does U.K. tobacco company Imperial Brands.

The work that Universal does in ensuring a stable, reliable supply of high-quality tobacco goes beyond simply connecting farming operations with tobacco product manufacturers. Universal works with a large number of farmers, coordinating its operations to provide consistency to its clients at an affordable price and in a manner that complies with local laws and regulations. The company also works to test crop protection products to help tobacco farmers avoid agricultural problems. Offering expertise on the best ways to grow tobacco as well as business advice and financing, Universal has strong partnerships with the farmers on which it relies. Those relationships have paid off, helping Universal build up an annual supply of more than 5 billion kilos of tobacco in leaf form.

Tobacco leaf drying on hangers and shelves.

Image source: Getty Images.

As important as tobacco is to Universal, the company has also worked hard to take advantage of opportunities in adjacent industries. The special services segment includes the laboratory services Universal provides, such as physical and chemical product testing and smoke testing for its clients. Universal also has a food ingredients business that goes beyond tobacco to cover fruit and vegetable production. However, arguably the most compelling investment proposition among Universal's special services is its liquid nicotine business, which has allowed the company to extend its services to clients specializing in e-cigarettes and other vaping products.

The interesting question facing Universal is whether it will look to move into the cannabis space at some point in the future. One analyst recently asked CEO George Freeman whether Universal might follow its clients into the marijuana arena, and Freeman noted that the product is still illegal in many jurisdictions. If it becomes broadly legal, then Universal is likely to take a look at the prospects for branching out, although greenhouse production of cannabis has huge differences from field production of tobacco. More likely as a prospect is hemp production, which became legal recently and which Universal's CEO says is closer to the core competencies the company has in tobacco production.

Universal shares the attractive dividend attributes that you'll find from major consumer tobacco sellers. Given its slightly different angle on the business, adding Universal to a tobacco portfolio is an interesting way to get diversification from up and down the supply chain.

A set of tobacco stocks that covers the industry

These five tobacco stocks have similarities and differences, and you don't necessarily have to invest in all five in order to get the exposure you want to the tobacco industry. With the business model for major tobacco companies currently in flux, however, it'll be interesting to see how various players react and what products become available to tobacco consumers in the years to come.