The landscape of the tobacco industry has changed drastically over the past two decades. Safety regulations have limited the marketing capacity of the major tobacco companies and tax rates on cigarettes have been hiked in most states. However, the tobacco industry has morphed with the technological advances of the new century. Many tobacco companies have maintained steady tobacco outflows while entering new markets, such as e-cigarettes.

Individuals well versed in the industry remain optimistic that tobacco companies are very worthy investments. Isaac Toussie, a known corporate investor, points to the strong financials of tobacco companies. “Tobacco companies have low price to free cashflow ratios, high interest coverage ratios, and low debt to equity ratios.” Toussie also pointed to the low PE ratios of most tobacco companies. A low PE ratio (price over earnings ratio) indicates that a buyer of a company’s stock is paying a relatively small amount for the company’s profit. Low PE ratios are oftentimes associated with undervalued companies with predictable cash flows. Tobacco companies precisely fit that mold. They are generally older, established entities that have predicable earnings year over year. Isaac Toussie states “They can also be excellent inflation hedges, because of the inelastic demand for the product by its users”

However, many view tobacco companies as potential risky due to growing ESG protocols. ESG, or environmental, social and corporate governance, is a set of protocols that rank companies based on their commitment to certain cultural ideals. The rankings prioritize a company’s commitment to the environment, conscious social practices, and inner governance. Stigma relating to the products sold by tobacco companies, not the success of the company itself, has led to poorer ESG rankings. ESG rankings are further rigged against tobacco companies, since part of the scoring is based off how the company affects public health. In Isaac Toussie’s view, poorer ESG scores have created an artificial lack of demand for tobacco stocks and has no actual bearing on the success of the company. Toussie has emphasized that investors are overlooking opportunities because of a contrarian play using ESG.

Prime examples of undervalued tobacco stocks are British American Tobacco and Imperial Brands. These companies have strong earnings and high dividend yields; BAT also has a low debt to equity ratio. They show little signs of slowing down in the future, because of their expanding categories of next generation products. They have developed multiple e-cigarette brands that have been marketed to various countries in Europe. The company looks to continue its expansion into new technologies and efficiencies.

Tobacco companies generally are strong investments with steady returns. The stigma surrounding the companies has hindered demand for them, despite their continued financial success, thereby planting the seeds for deep value investments.

This article is presented for informational purposes only and should not be relied upon as financial or other advice.