Peter Lukacs — This is why I hunt for unpopular stocks: Scandinavian Tobacco
A 19-minute thesis revisit after Q2 2026 results: why the Danish cigar and nicotine-pouch maker crashed (a ~50% dividend cut, ERP disruption, weak Europe), what the Focus 2030 plan and the new 40–60% payout framework fix, how its profitability compares with the big tobacco names, and a conservative three-scenario DCF that still shows +77% in the bear case.
One-line take: an unpopular, execution-challenged business priced for failure. Scandinavian Tobacco Group is down 24% year to date after March's ~30% crash on a close-to-50% dividend cut, weak 2025 free cash flow (partly a temporary ERP receivables delay) and lost investor confidence. Lukacs likes the reset: a capped 40–60% payout of adjusted EPS, deleveraging from 3.0× toward 2.5×, an investment-grade Baa3 rating, and a Focus 2030 plan to stabilise European machine-rolled cigars while growing US handmade cigars and nicotine pouches. Anchoring his DCF to the bottom, middle and top of 2026 FCF guidance (DKK 950m–1.2bn) with near-zero growth and modest buybacks gives bear +77% / base +130% / bull +190%; at the midpoint that is ~18% FCF yield and ~7% dividend. Management has under-delivered before, so execution is the risk — but on risk/reward "this could be number one."
1. Stocks & names mentioned
| Ticker | Name | Research | View | What he said | At |
|---|
| STG.CO | Scandinavian Tobacco Group | STK | Positive | "If you're thinking about a risk-reward story, this could be number one." ~18% 2026 FCF yield at the guidance midpoint, ~7% dividend under the new 40–60% payout; conservative DCF (10% discount rate, 0–1% growth, 5–15% buybacks) gives bear +77% / base +130% / bull +190%. Risk: management has under-delivered on guidance before; Europe weak, pouches only ~4% of sales. | 17:42 |
| MO | Altria Group | QT · SA · STK · FA | Neutral | Profitability benchmark: with BTI and PM a "top dog" at 40–50% return on tangible assets; but "one of the criticism I have for Altria was that they have an 80% payout ratio." | 11:54 |
| BTI | British American Tobacco | QT · SA · STK · FA | Neutral | Profitability benchmark: one of the "top dogs" with Altria and Philip Morris at 40–50% return on tangible assets — "massive profitability." | 09:32 |
| PM | Philip Morris International | QT · SA · STK · FA | Neutral | Profitability benchmark at 40–50% return on tangible assets; "even Philip Morris has a very high payout ratio relative to the free cash flow." | 12:18 |
| IMBBY | Imperial Brands | QT · SA · STK | Neutral | Profitability tier below the big three at roughly 25–27% return on tangible assets, ahead of Scandinavian Tobacco (which sells cigars, pipe tobacco and pouches, not cigarettes). | 09:56 |
Not tabled: XQS (Scandinavian Tobacco's own nicotine-pouch brand) and Cohiba (a cigar brand his father smoked) — both folded into the STG.CO row; the euro bond (4.875% coupon, ~4.3% yield) viewed on Interactive Brokers is STG's own debt. Row id STG.CO (Copenhagen) because bare "STG" is a different US-listed company.
2. Talking points
00:24 Why the stock crashed
- Down 24% year to date; shares fell almost 30% in March after disappointing full-year results, led by a close-to-50% dividend cut plus weaker earnings, margins and free cash flow.
- Some cash-flow weakness was temporary (ERP-related receivable delays), but the crash reflected weak execution, the dividend reset and lost investor confidence — "the stock now looks extremely attractive from a valuation perspective."
01:12 Focus 2030: cigars and nicotine pouches
- Three priorities: win in US handmade cigars, defend leadership in European machine-rolled cigars, build a meaningful European nicotine-pouch business.
- Legacy categories grow 1–2% a year; pouches are projected at 18%+, but are only ~4% of sales today.
02:53 The real problem: execution and payout
- Financial performance has lagged management's ambitions, so guidance must be taken "with a grain of salt."
- Leverage above the 2.5× target and an old dividend too high relative to earnings — "a classic case" of paying out too much and under-reinvesting.
03:39 Segments: US up, Europe down
- North America Branded & Rest of World EBITDA +30%, helped by US handmade share gains, pricing — and one-off US tariff refunds ("we'll see how sustainable").
- Europe Branded −16%: key markets −4%, share lost in France after a product-quality issue, an obsolete-inventory write-down cutting H1 margin ~2.5 pts — "very questionable."
- North America Online & Retail +~10% on the handmade cigar market, new stores and tariff refunds.
05:03 Balance sheet and credit
- Debt-to-equity is less meaningful with heavy goodwill; the company's own metric is net interest-bearing debt / EBITDA before special items — 3.0× now, target 2.5×. Interest coverage ~5×.
- Moody's Baa3 (investment grade); its euro bond (4.875% coupon at issuance) trades above par at ~4.3% yield.
06:56 Free cash flow and the new payout
- 2026 FCF guided to DKK 950m–1.2bn, much of it earmarked for debt reduction; the 2025 dividend exceeded free cash flow.
- 21% of shares bought back since 2019, so FCF per share at the midpoint is close to the 2021 peak.
- 40–60% of DKK 9–11 adjusted EPS = DKK 3.60–6.60 a share; midpoint 5.10 ≈ 7% yield.
08:25 Profitability on tangible assets
- He measures return on tangible assets (total assets minus intangibles) using free cash flow — "the core metric you should use"; it has declined but is "somewhat decent."
- Company ROIC 8.3% in 2025, target 11%+; 2026 EBIT margin guided 13–14.5%.
09:32 Versus the big tobacco names
- Altria, British American Tobacco and Philip Morris at 40–50% return on tangible assets; Imperial Brands ~25–27%; STG below — but it sells cigars, pipe tobacco and pouches, "a bit different of a business."
10:22 2030 financial ambition
- Low-single-digit EBIT CAGR, ROIC above 11%, FCF above DKK 1.2bn by 2030 — gradual margin and cash improvement, not explosive growth.
- After deleveraging to ≤2.5×, keep the 40–60% payout and use the excess for more meaningful buybacks.
11:13 The dividend cut was the right call
- "The market will punish you if you do that but you have to do that to keep the business alive" — a big plus that protects the investment-grade rating.
- Contrast: Altria's ~80% payout and Philip Morris's high payout relative to FCF; his preference would be the low end of the range plus reinvestment.
12:42 The valuation model
- 10% discount rate; FCF anchored to the bottom (950), midpoint (1,075) and top (1,200) of 2026 guidance for bear / base / bull; 0–1% growth, no growth beyond 2033.
- Share count cut 5 / 10 / 15% — far less than the 21% bought back over the past seven years.
14:07 Result: +77% even in the bear case
- Bear +77%, base +130%, bull +190% — "massive margin of safety," even with weak growth and a quarter of the historical buyback pace.
14:55 Summary scorecard
- Operations: leader in US handmade and European machine-rolled cigars; pouches the growth option, but "everybody wants to do nicotine pouches."
- Execution recovering after the 2025 ERP disruption; US improving, Europe the weak spot.
- H1 usually understates tobacco/consumer free cash flow — the second half catches up.
17:42 Verdict: asymmetric risk/reward
- ~18% 2026 FCF yield at the guidance midpoint and ~7% dividend; upside from buybacks after deleveraging and any growth surprise.
- Still relies on guidance from a management that under-delivered; his conservative assumptions are the protection. On risk/reward "this could be number one."
3. In plain English
STG.CO — Scandinavian Tobacco Group Positive
Scandinavian Tobacco is a Danish company that is the world's biggest maker of cigars — hand-rolled premium cigars sold mostly in the US, and cheaper machine-made cigars and pipe tobacco sold mostly in Europe — plus a small but fast-growing nicotine-pouch brand (XQS). The shares fell hard this year because the company badly missed its own targets, a new IT system (ERP) disrupted billing, European sales slipped, and it cut its dividend roughly in half.
Lukacs thinks the market over-punished it. The dividend cut is healthy: the company now pays out 40–60% of earnings instead of more than it earned, which leaves cash to pay down debt and buy back shares. Using the company's own 2026 guidance for free cash flow (the cash left after running and maintaining the business), the stock yields about 18% in cash and roughly 7% in dividends. Even assuming almost no growth and few buybacks, his discounted-cash-flow model says the shares are worth 77% more than today; the middle case is +130%.
The catch is trust: this management team has over-promised before, so the numbers only work if they deliver. That is why he builds in very conservative assumptions — and why he ranks it as possibly his best risk/reward idea.
For personal study — not investment advice. Source material © Peter Lukacs Research.