Title: Compared 6 Tobacco Stocks — One Is Seriously Undervalued Show: Peter Lukacs Research (YouTube) Guest: Peter Lukacs Date: 2026-09-04 URL: https://youtu.be/XI2YEScis6M Length: 20:04 Note: YouTube auto-transcript; fillers (uh / you know) and stutters removed, wording otherwise verbatim. ASR garbles left in the text: "JTI" = Japan Tobacco (JT Group); "downhill" = Dunhill; "On On" = on! (Altria's pouch brand); "blu, pulls, and zone" = blu, Pulze and Zone X (Imperial); "plume" = Ploom; "car channel" = Discord channel; "vapors on profitability" = weaker on profitability; "Orce" = fourth; "reuse risk product" = reduced-risk product; "return investment" = return on investment.
00:00 Good day investors. Today we are going to compare the top six tobacco stocks out there. We're going to look at the thesis of why invest in tobacco in the first place. Then we're going to compare these six companies and finally summarize and rank them. With that, if you want to dive deeper or just want to support the channel, feel free to check out my YouTube membership where I post weekly how and why the portfolio changed, what's on my watch list, some other updates, and with the boardroom tier you can get also access
00:26 to this car channel where we can have direct discussions. Now, this chart looks purely at share price performance excluding dividends with every stock indexed to 100 in January 2020. You can see that Philip Morris and JTI have clearly been the strongest performers while Scandinavian Tobacco has really fallen off a cliff from its 2020 highs.
00:50 Altria has performed well. So, that's been lagging the top three but steadily moved higher while BAT bottomed around 2024 and then they had a huge rally. Now, that's actually when I bought BAT. So, when I was late '23 and early '24 I was looking at the company and I was like, "Okay, this is just crazy cheap for this business.
01:15 If they just, not no need of miracles, they just have to chug along then it's going to turn out fine and that turned out to be correct. Now, Imperial Brands also rallied massively from its low. So, this is the blue line from its lows but has sold off sharply from its peak. So, short in 2026 it's down a lot following some weak results weaker news.
01:42 Now, the classic tobacco story is well known. Smoking prevalence continues to decline globally and this translates into falling traditional tobacco volumes but the volume decline is actually less dramatic than these percentages suggest because the absolute global population is still growing.
02:02 So, combustibles are clearly a structural decline market, but it's a gradual decline rather than a market disappearing. So, for example, in 2000, let's say 50% of males smoked. Actually, that's an insane number. But, in 2000, I don't know, you had like 6 billion people. Today, 3% smoke. And today, what do you have? Like 9 billion, 8 billion something? So, you have a larger number to have the percentage also.
02:29 That's also working in these companies' favor that the decline is much slower. That's the one leg of the story. The other side is, of course, volume and price. So, on the other hand, tobacco is highly price inelastic, which gives the companies exceptional pricing power. Now, driven by strong brands and the addictive nature of the product.
02:50 In high-income countries, so this is just an example in this line, in high-income countries, this means that there is an elasticity of 0.4, meaning if you increase the price by 10%, volume will drop only by 4%. So, these tobacco companies were able to offset the declining volumes with just increasing prices.
03:10 So, volumes would decline anyway, and then if you increase prices, that, of course, hits demand, so that would also make your volume decline faster. But, because of the price inelasticity, they have pricing power, they can just raise the prices to offset both of that. And if you look at just company presentations, they will clearly show this that, "Hey, actually volume declined 1.
03:31 5%, but we could offset it by raising prices, and then in the end we increased profits by 3%." Now, and then we have the new product. So, traditional cigarettes are declining, but reduced risk products, I mean, this is a subjective term. Like, you can argue if smoking vape is worse than smoking tobacco.
03:52 Now, let's call them reduced risk products, especially heated tobacco and nicotine pouches are growing rapidly. The big tobacco companies are using their massive cash flows from combustibles, the traditional tobacco, traditional cigarettes, to fund this transition with Philip Morris leading through IQOS and BAT strongly positioned through Glo and Vuse. We'll cover all of those.
04:13 The question is whether this growth can increasingly offset the cigarette volume decline, and are these products profitable enough? Now, let's compare looking at the KPIs. Philip Morris is far ahead with about 42%. You can see the chart is not anchored at 0 to 100%, but I played around with it so you can clearly see the breakdown.
04:37 So, you can see that 42% of Philip Morris is already outside of combustibles led by you have IQOS, you have Zyn versus the traditional brands like Marlboro internationally sold. BAT is a distant second. So, this is one, this is two. With Vuse, Glo, and Velo, while its cigarette portfolio includes stuff like downhill and Lucky Strike.
04:58 Now, Altria is a much more cigarette-heavy third dominated by Marlboro in the US, while On On is basically the main growing alternative platform for Altria. Now, JTI, so Japanese Tobacco, remains roughly 90% traditional with Winston and Camel, but investing heavily into Ploom, and also has Nordic Spirit, and they have some foods business, but that's kind of immaterial.
05:29 Imperial is even more combustible-heavy with brands like Winston and Black Russian, as if you know that type of brand. And they're trying to build out blu, pulls, and zone, but we'll see how that works out. They're still pretty much just tobacco play. And then you have a Scandinavian Tobacco, which is of course different.
05:51 Its core business is cigars and cigar names like Cohiba, while nicotine pouches are its main push into modern tobacco, modern nicotine, I would say. Now, valuation. How should it The business can be really good, but if you overpay, then the investment will be not as good. So, good business, not always a good investment.
06:10 Philip Morris is clearly the best company on this list. Premium price name. So, you have around a 4% free cash flow yield and the negative discounted cash flow upside in my model. And by the way, if you are curious about each individual company, in the last like a week and a half, I covered all of them.
06:33 So, you can just get a deep dive on their more recent numbers and revisited thesis. So, it's cheap. I mean, it's not cheap and they are not doing buybacks, they are doing dividends, so maybe the management and reinvest in a business. So, the management probably doesn't think the share is cheap. JTI looks expensive as well at under 5% free cash flow yield, but of course we are talking about Japan.
06:54 They had low rates for many years. So, generally their stocks are not as cheap or haven't been really cheap for a while. With yields now rising, maybe we'll see Japanese stocks getting cheaper. So, and FX is also riskier. So, just keep those in mind. And then you have Altria, which is reasonably cheap with around an 8% free cash flow yield, but fundamentally still just a US Marlboro story or US tobacco story with capital returns heavily dividend focused.
07:24 They are basically paying out 80% of cash flow as dividends with some buybacks. Now, BAT is probably the best balance here around the 10% free cash flow yield with a 60%ish discounted cash flow upside despite the huge rally over the last couple of years. So, imagine, I think BAT I write here BATs, but if you think about the US ADR, BTI is around like $55 or something like that.
07:50 I bought this stock at the 30s or below 30. So, it basically doubled since then if I don't count dividends. But, it's still relatively cheap, right? I remember when I first bought it, I'm not first, but when I really started buying it, it was like closer to 20% free cash flow, like 17 to 20%. It was crazy cheap. Now, you have Imperial Brands.
08:12 After the year's sell-off, it looks extremely cheap with 12% free cash flow yield and around 100% upside model. It doesn't need any spectacular growth. It just needs to normalize and steady the execution. So, if management just delivers even on the bottom of the guidance, this is a relatively cheap and good buy.
08:33 And then you have Scandinavian Tobacco, which is the extreme outlier with an 18% free cash flow yield based on management midpoint guidance and 125% upside, but also clearly the highest risk turnaround. So, you have a dividend cut, you have deleveraging. I'm in favor of both of those.
08:51 What makes me hesitant is the restructuring and the history of missed management targets. So, that is something that makes me more cautious, but given it's relatively cheap, I just keep an eye on it. Now, profitability. Given how goodwill and intangible-heavy tobacco companies are, I prefer to focus on return on tangible assets as my first glance and second glance return investment.
09:14 So, I don't really care about return on equity for these names. For example, Philip Morris has negative equity. So, it doesn't tell you much. And I'm also using 7-year average based on free cash flow. So, that is how I calculated profitability here. That's what's on this chart. You can see that Altria is a clear winner, while Philip Morris is probably the second overall when combining both metrics.
09:40 BAT has exceptional tangible returns, but weaker return investment. They have some higher historical intangibles on the books given the 2017 Reynolds acquisition, mainly. While Imperial sits bit lower, right, than all of them, but still very profitable. So, bit behind the top three, but still very profitable.
10:02 Now, you have Scandinavian Tobacco, which is clearly weaker, partly it's a cigar heavy business. It's not tobacco. I mean, tobacco, but cigar, not cigarettes. While JTI is the clear outlier for the downside on profitability. With Japanese companies just, you can read a book called The Dollar Crisis.
10:25 It talks about the liquidity trap, the hurting corporate profitability. So, Japan from that perspective, then their companies can be weaker. Could be the reason could be the explanation here. Now, credit quality is solid across all six with let's look at the table. With Philip Morris and BAT the strongest I mean, Philip Morris and JTI are the strongest with the credit rating followed by BAT and Altria.
10:54 While Imperial Brands and Scandinavian Tobacco are lower, but they are still investment grade. Now, the same story is visible in the chart. Although Imperial's recent 3.4 times interest coverage ratio is somewhat historically over the past 7 years they have seven times. And I think, for example, Scandinavian has like five times.
11:15 So, misleading, these are all investment grade. Where I would be somewhat concerned is STG and not so much for the others. And with that, let's look at the table how I like these companies, how I would rank these companies. So, first I have Imperial Brands. I think it's relatively cheap. It's very profitable still.
11:39 And the credit quality is still investment grade and good. The mix is more tobacco focused, so they are behind. And from a qualitative standpoint, strong pricing and cash generation. Weaker and new like reuse risk product execution, but excellent capital returns and with progressive dividends and massive buybacks.
12:02 So, the reason for Imperial Brands if I would have to sum it up is that they make good cash. They will grow. But really it's their really good capital allocation framework, which is funding that cash into the cheap shares to buy them back. So, this is pretty decent one. But of course, this is not the top quality name here.
12:23 BAT is pretty solid. So, you have this is still cheap enough. I sold BAT at like 55. So, basically is the stock at the same level where I sold a couple months ago. Profitability is very good. Very very good on the return on tangible assets. Return on investment is kind of lower, but maybe it is not even our focus given I explained that return on tangible assets is really what matters here. Credit quality is extremely good.
12:48 They are second to only Philip Morris, and Philip Morris is beating everybody on their new product portfolio. I remember them in 2021, 2022 with the earlier CEO talking about funding the new product categories instead of doing more buybacks and dividends. Clearly it's and those categories were not profitable at all.
13:13 Today they are profit I mean, not all, but they are much more profitable than they were. They were losing money back then. So, BAT had a really good turnaround. And if you think about the qualitative aspects, they have strong global brands, improving new categories, balanced capital allocation framework with the progressive dividend, deleveraging, so they are still focusing somewhat on that, and decent sustainable buybacks.
13:36 So, if I think about BAT's like payout ratio, dividends versus the free cash flow, they are like 55%. So, they have room to delever and do buybacks. Imperial Brands is also similar. They are like maybe 50-60% dividend payout ratio on the free cash flow basis, and everything else is just fueling buybacks.
13:59 I really like both of these stories. Altria is a decent third. I'm not investing in US companies because of double tax treaty situation. Basically no double tax treaty in Hungary since 2024 with the US, so I'm avoiding that. But, I still put Altria on the third. And then you can think about it as valuation is reasonable, so it's cheap enough. It's around fair value.
14:22 Profitability is very strong, so the strongest out of the names. Credit quality is extremely robust. Tobacco and others, so they are actually not as bad on new products as I thought when I revisited the thesis. So, Altria is getting better, and of course they have the right to sell Marlboro in the US.
14:45 And from a quality perspective, of course they have the exceptional US cigarette franchise with Marlboro, but limited diversification, but still not bad. And I'm just not a fan of their capital allocation story. They pay out roughly 80% of free cash flows dividends, which leaves much less room for buybacks. That said, if your stock is not cheap, and they are not necessarily cheap, then it does make sense to do dividends.
15:12 Now, Orce is Scandinavian Tobacco. I put it here just because it's so damn cheap. Profitability is lower than basically everybody else other than JTI. Credit quality is still up there, so they are still investment grade. They issued in 2024 September, 4.875% 300 million euro bond. That is trading today at yield to maturity at like 4.2%.
15:45 So, that's trading at a premium, so that nobody is really worried about their credit on the market. They are still majority tobacco which is cigars and the other category is truly just pouches, that is growing. Qualitatively, so this is a leading cigar franchise and nicotine pouch is an upside growth target. But, execution is a risk, so they reseted their dividend target to 40 to 60% payout ratio, so they cut the dividend with buybacks after deleveraging.
16:14 So, I like the capital allocation move. They want to transform results into I mean, operational results into better financial results and I'm up for that. So, when a company cuts dividends when the dividend was not sustainable, I tend to be more kind to them. So, this is really good. Cut the dividend, delever, do buybacks, and make sure the underlying business is running well, so reinvest in that business.
16:41 And with that, looking at Philip Morris. So, this is clearly the best company out there. They should be number one. Except they're too expensive. That's my opinion. Profitability is top two. Credit quality top one. Best one in the mix of tobacco and everything else. So, they have these strong brands.
17:01 Basically, they were leading everybody else with Zyn. And of course with IQOS and all of these new products and qualitatively. So, this is just by far the best company, best in class smoke-free portfolio and growth. Of course, they also sell the Marlboro internationally while Altria can sell it in the US. They have progressive dividends, but currently they prioritize reinvestment into the business, somewhat deleveraging over buybacks.
17:26 So, buybacks is not the thing for Philip Morris. I think they have the shares outstanding flat over the last 7 years, which is not necessarily an issue because if you think about capital allocation framework again, I bring this up. First, you want to reinvest in the business if you have a decent return investment.
17:43 And Philip Morris is doing massive reinvestment in the business. That's why they are leading in the new categories because they reinvested in the business. They didn't want to do financial shenanigans buybacks. They wanted to just grow the business, and that will grow your share price, and they were the best-performing company in the past 6 years compared to 2020.
18:02 So, reinvest in the business, buyback your share if it's cheap. They're not buying back shares because they don't think it's cheap. I think that's a reasonable assumption. And pay dividends, and they are paying dividends. So, they're doing it great. So, everything is fine with Philip Morris.
18:17 It's just they are too damn expensive to me as of now. Based on current free cash flow yield, based on discounted future cash flows, based on company guidance. And they have strong guidance, so they have like 9 to 11% EPS growth target. So, I'm modeling those growth assumptions, and even with that, the company is just too damn expensive.
18:41 JTI, same story except they have vapors on profitability. So, JTI's I think the worst on this list for a reason. They are expensive, and they are not that good. Although, they have really strong global brands. Credit quality is extremely high. They are still basically a tobacco play with other categories include some foodstuff, but that's really negligible.
19:01 And of course, the new products. Qualitatively, they are still fine, right? So, they are strong global franchise. They are accelerating plume. They have a very high dividend payout ratio 75% with buybacks they are thinking about no buybacks yet. They are considering it. Now I think what they are is like they are a somewhat weaker version of Philip Morris.
19:27 They reinvest in the business which is great. And but they are less profitable. And they have really good brands globally. So overall I think this is how I'm thinking about this. I might add some Imperial Brands. Not sure if I would add back BAT. Maybe I add back Imperial Brands and I'm really thinking about Scandinavian Tobacco but first I need some execution from management there.
19:53 So that's how I'm thinking about this. I hope you found this video helpful. Please consider liking, subscribing, checking out the membership, leaving comments, and I'll see you in the next one. Take care.