Amid several headwinds, like heightened health consciousness among individuals, stringent government regulations, and higher taxation, tobacco usage has declined over the years. However, tobacco firms have responded by introducing low-risk alternatives with potential promise for the industry owing to their broad acceptance.

Given this backdrop, fundamentally strong tobacco stocks Imperial Brands PLC (IMBBY), Universal Corporation (UVV), and Japan Tobacco Inc. (JAPAY) could be solid buys this month.

The detrimental health impacts of smoking, which encompass a broad range from Cancer to chronic obstructive pulmonary disease (COPD) such as emphysema, are no secret. Despite this, the gripping, addictive properties of nicotine lead many to persist with their smoking habits, even with the full understanding of these risks.

Despite the rigorous regulations imposed by numerous countries to clamp down on tobacco consumption, the tobacco industry maintains its relentless expansion. Persistently high rates of smoking and consistent demand for tobacco products underpin the growth of this industry. A staggering 28 million American adults are cigarette smokers. Over a little more than a decade, there has been an increase in the frequency of habitual smokers among senior citizens, rising from 8.7% to 9.4%.

Moreover, in response to the obstacles faced, the tobacco corporations are intensifying their efforts to tackle the issues by championing safer alternatives like snus, e-cigarettes, and pouches. The global e-cigarette and vape market is poised to reach $59.17 billion by 2031, growing at a CAGR of 14.2%, fueled by increasing awareness of safe, smokeless alternatives to traditional tobacco offerings.

The global tobacco market is projected to expand at a CAGR of 2.6% to reach $1.10 trillion by 2030.

With these favorable trends in mind, let's delve into the fundamentals of the three Tobacco stock picks, beginning with the third choice.

Stock #3: Imperial Brands PLC (IMBBY)

Headquartered in Bristol, the United Kingdom, IMBBY manufactures, imports, markets, and sells tobacco and tobacco-related products. The company operates through two businesses: Tobacco & NGP and Distribution.

IMBBY paid two interim dividends of 21.59 pence per share in June and September 2023. The board has approved a further interim dividend of 51.82 pence per share and will propose a final dividend of 51.82 pence per share, bringing the total dividend for the year to 146.82 pence.

This represents a 4% increase to 141.17 pence per share paid in the prior year and aligns with its progressive dividend policy. The third interim dividend will be paid to the shareholders on December 29, 2023.

IMBBY bought back up to £1.10 billion ($1.39 billion) of shares, a 10% increase on last year’s £1 billion ($1.27 billion) buyback. Taking the dividends and buyback together, capital returns to shareholders are expected to exceed £2.40 billion ($3.04 billion) in the coming fiscal year.

Its annualized dividend rate of $1.79 per share translates to a dividend yield of 7.40% on the current share price. Its four-year average yield is 9.41%.

IMBBY’s trailing-12-month cash from operations of $3.82 billion is 430.9% higher than the industry average of $719 million. Its trailing-12-month net income and levered FCF margins of 12.88% and 11.76% are 163% and 142.2% higher than the industry averages of 4.90% and 4.86%, respectively.

In the fiscal year that ended September 30, 2023, IMBBY’s revenue stood at £32.48 billion ($41.09 billion), while gross profit increased 10.6% year-over-year to £6.68 billion ($8.45 billion). Moreover, its adjusted EBITDA increased 5.6% year-over-year to £4.16 billion ($5.26 billion).

For the same period, profit for the year attributable to owners of the parent and adjusted earnings per share stood at £2.33 billion ($2.95 billion) and 278.80 pence, up 48.3% and 5.1% from the year-ago values, respectively.

Street expects IMBBY’s revenue and EPS for the fiscal year ending September 2024 to increase 2.8% and 10.7% year-over-year to $12.19 billion and $3.11, respectively.

The stock has gained 11.7% over the past six months to close the last trading session at $24.17. Over the past month, it has gained 6.9%.

IMBBY’s POWR Ratings reflect its positive prospects. The stock has an overall B rating, equating to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has a B grade for Value. Within the A-rated Tobacco industry, it is ranked #6 out of 9 stocks.

To see additional POWR Ratings for Growth, Momentum, Stability, Sentiment, and Quality for IMBBY, click here.

Stock #2: Universal Corporation (UVV)

UVV processes and supplies leaf tobacco and plant-based ingredients worldwide. The company operates through two segments: Tobacco Operations and Ingredients Operations. 

On November 2, UVV’s Board of Directors declared a quarterly dividend of $0.80 per share on the company's common shares, payable to common shareholders on February 5, 2024. The company has paid dividends for 52 consecutive years.

Its annualized dividend rate of $3.20 per share translates to a dividend yield of 5.39% on the current share price. Its four-year average yield is 6.15%. UVV’s dividend payments have grown at CAGRs of 1.3% and 4.1% over the past three and five years, respectively.

UVV’s trailing-12-month cash per share of $4.06 is 150.8% higher than the industry average of $1.62, while the trailing-12-month levered FCF margin of 9.81% is 102% higher than the industry average of 4.86%.

In the fiscal second quarter that ended September 30, 2023, UVV’s sales and other operating revenues stood at $638.48 million, while adjusted operating income increased 52.9% year-over-year to $57.91 million.

For the same quarter, adjusted net income attributable to UVV and adjusted earnings per share stood at $30.26 million and $1.21, up 38.5% and 37.5% from the year-ago values, respectively. For the six months that ended September 30, cash, restricted cash and cash equivalents at the end of the period increased 53.7% from the year-ago period to $99.68 million.

The stock has gained 17.2% over the past month to close the last trading session at $59.33. Over the past three months, it has gained 25.1%.

UVV’s solid fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, translating to Buy in our proprietary rating system.

UVV has a B grade for Value. Within the same industry, it is ranked #5.

Beyond what we’ve stated above, we have also rated the stock for Growth, Momentum, Stability, Sentiment, and Quality. Get all ratings of UVV here.

Stock #1: Japan Tobacco Inc. (JAPAY)

Headquartered in Tokyo, Japan, JAPAY manufactures and sells tobacco products, pharmaceuticals, and processed foods in Japan and internationally. The company operates through three segments: Tobacco Business; Pharmaceutical; and Processed Food. 

On October 31, JAPAY launched Ploom X ADVANCED, its newest heated tobacco device in Japan, sold at convenience and tobacco stores nationwide. The new device delivers enhanced taste satisfaction compared to the old Ploom X model, thanks to the "POWER HEATFLOW " heating engine. This launch is a key milestone in the company’s journey.

Its annualized dividend rate of $0.75 per share translates to a dividend yield of 5.77% on the current share price. Its four-year average yield is 6.93%. JAPAY’s dividend payments have grown at a 1.9% CAGR over the past three years.

JAPAY’s trailing-12-month EBIT margin of 24.54% is 195% higher than the industry average of 8.32%. Its trailing-12-month net income and levered FCF margins of 17.14% and 14.93% are 250% and 207.3% higher than the industry averages of 4.90% and 4.86%, respectively.

In the fiscal third quarter that ended September 2023, JAPAY’s revenue increased 3% year-over-year to ¥764.20 billion ($5.20 billion), while adjusted operating profit stood at ¥221.50 billion ($1.51 billion). Moreover, its profit increased 11% year-over-year to ¥155 billion ($1.06 billion).

For the nine months that ended September 2023, basic EPS and FCF stood at ¥249.01 and ¥420.30 billion ($2.86 billion), up 9.4% and 50.4% year-over-year, respectively.

Street expects JAPAY’s revenue for the fiscal year ending December 2023 to increase 356% year-over-year to $18.58 billion. Its EPS is expected to be $0.01. The company surpassed consensus revenue estimates in each of the trailing four quarters.

The stock has gained 29.8% year-to-date to close the last trading session at $13.02. Over the past nine months, it has gained 29.7%.

JAPAY’s robust prospects are reflected in its POWR Ratings. The stock has an overall B rating, equating to Buy in our proprietary rating system.

JAPAY has an A grade for Stability and a B for Quality. It is ranked #3 within the same industry.

Click here for the additional POWR Ratings for JAPAY (Growth, Value, Momentum, and Sentiment).

What To Do Next?

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JAPAY shares were unchanged in premarket trading Tuesday. Year-to-date, JAPAY has gained 32.53%, versus a 20.74% rise in the benchmark S&P 500 index during the same period.

The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.

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