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Why Altria Group, Philip Morris International, and Reynolds American Are Up More Than 10% in 2016

All three tobacco stocks have done well this year. Find out why.


Altria keeps powering ahead

Altria has gained almost 11% so far in 2016, and part of what distinguishes it from its two tobacco peers is the breadth of its business. Under its corporate umbrella, Altria not only has its key Philip Morris USA tobacco business but also its smokeless tobacco unit, its wine business, and a minority interest in beer giant SABMiller. Smokeable products are the bread and butter for Altria’s success, but its other businesses help diversify its exposure to some extent and also offer new avenues for potential growth.

For instance, the pending deal for SABMiller to get acquired by Anheuser-Busch InBev will give Altria a substantial stake in the acquiring company, with its percentage share being smaller but with Anheuser-Busch being a much larger enterprise.

In addition, Altria has worked on maximizing its profitability. Moves like controlling costs with a $300 million productivity initiative and shoring up its balance sheet to get an improved bond rating are measures that can boost the bottom line and make Altria shares rise even more.

Philip Morris International fights international headwinds

Philip Morris International is the winner of the three stocks, rising nearly 14% so far this year. What makes the gains more impressive is that the company has had to deal with plenty of challenges in its internationally focused business. Downward pressure from weak foreign currencies has stunted Philip Morris International’s earnings growth, and a recent adverse decision from a U.K. court upholding plain packaging regulations extended a trend that has caught on across the world.

So far, pricing power and brand loyalty have been enough to sustain Philip Morris through tough times as it outperforms many of its global peers. Longer-term, Philip Morris is especially confident that its efforts to build a franchise based on reduced-risk products like its iQOS heat-not-burn tobacco system will produce growth to replace any loss in the traditional cigarette business.

Reynolds American rides post-merger enthusiasm

Reynolds American has risen 11% in 2016, and the ongoing success of its acquisition of Lorillard continues to power the company forward. The integration of the Newport brand has gone well, and that has made the company an even stronger No. 2 challenger to Altria in the domestic tobacco market. The company has described the Lorillard merger as being “transformational” to its business. Newport in particular is responsible for 14% market share in the domestic tobacco market, coming close to matching the combined brand power of traditional Reynolds American brands Camel and Pall Mall.

Yet one of the biggest victories for Reynolds American has come from the super-premium market, where Natural American Spirit has been a surprisingly strong performer.

By tapping into demand for higher-quality products, Reynolds American has created a franchise that could rival long-established brands at its competitors for years to come.

Tobacco stocks in general have performed quite well in 2016. As long as they can manage to keep growing earnings despite the challenges they face, tobacco giants are likely to deliver solid share-price performance and dividend income to their investors.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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