The major tobacco companies are progressively moving away from traditional cigarette operations, leading investors to reassess the sector's value.
The Zyn nicotine pouch is a core product for Philip Morris International Inc (NYSE: PM) in the US market.
While ethical debates surrounding tobacco investments have not completely vanished, the industry is developing new avenues for growth in a grey area.
Tobacco giants generating significant revenue from smoke-free products like e-cigarettes are gradually regaining acceptance from mainstream capital, with their share valuations rising accordingly. Philip Morris International Inc (NYSE: PM) has been the first to benefit from this trend, and British American Tobacco p.l.c. (LON: BATS) is now following a similar path.
Investors who entered British American Tobacco p.l.c. (LON: BATS) two years ago have nearly doubled their money, outperforming the returns of the US "Magnificent Seven" tech stocks. All tobacco stocks have shown strong performance over the same period, with the share price of Marlboro's US manufacturer, Altria Group Inc (NYSE: MO), rising over 50%.
A More Favorable Policy Landscape
The second Trump administration is perceived as being more accommodating to the tobacco industry than its first term and significantly more so than the Biden administration. In 2017, the US Food and Drug Administration (FDA) threatened a severe crackdown on cigarettes, and regulatory risks subsequently weighed on tobacco share prices for a long period. That policy pressure has now notably eased. Several tobacco companies have also made donations to the pro-Trump super PAC MAGA Inc., attempting to address long-standing policy challenges facing the industry.
The FDA's recent adjustment of regulations for smoke-free nicotine products positions British American Tobacco p.l.c. (LON: BATS) to potentially be the biggest beneficiary. The new regulatory guidance allows companies to launch new products like e-cigarettes and nicotine pouches for sale while their Premarket Tobacco Product Applications (PMTAs) are still under review.
Previously, companies had to wait for full PMTA approval before selling new products, a process that could take years. This old system made it difficult for tobacco firms to retain consumers switching from cigarettes to smoke-free nicotine products, allowing illicit tobacco products to seize market share. Data shows over two-thirds of e-cigarettes in the US market are illicit, mostly imported from China.
The new rule is highly controversial in public health circles but helps tobacco companies expand their smoke-free businesses. This is crucial as cigarette consumption in the US has been in long-term decline, forcing companies to find new revenue streams to offset the drop. Analyst statistics indicate North American cigarette sales have fallen by one-third since 2020. Tobacco firms previously relied on price hikes to maintain revenue, but as the base of smokers shrinks rapidly, this pricing power will eventually be exhausted.
Another major advantage of the smoke-free business is its potential to attract back institutional investors who had divested from tobacco stocks due to ethical ESG principles. The tobacco industry, alongside defense and fossil fuels, remains one of the most commonly excluded sectors by asset managers. However, many funds can now rationalize holding stakes in tobacco companies that are phasing out traditional cigarettes.
Leading the Smoke-Free Transition
Philip Morris International Inc (NYSE: PM) derives 41% of its revenue from non-combustible products, ranking first in the industry for smoke-free revenue share. Its core smoke-free product is the IQOS heated tobacco device, which is not yet fully launched in the US but is popular in markets like Japan and Europe. PMI does not sell cigarettes in the US; its main product there is the Zyn dry nicotine pouch. The stock currently trades at a forward P/E of 21, representing a 70% valuation premium over Altria Group Inc (NYSE: MO) and British American Tobacco p.l.c. (LON: BATS).
Last year, nearly one-fifth of British American Tobacco p.l.c.'s (LON: BATS) revenue came from smoke-free products, including Vuse e-cigarettes and Velo nicotine pouches. Following PMI's trajectory, reaching this revenue milestone for smoke-free products tends to trigger a significant valuation re-rating. In 2019, when PMI's smoke-free revenue hit 19%, its stock began to command a sustained and substantial premium over its peers.
British American Tobacco p.l.c. (LON: BATS) aims to increase its smoke-free revenue share to 50% by 2035, with a core goal of recapturing US vaping consumers from illicit e-cigarette brands. The new FDA rule allows the company to launch the latest Vuse e-cigarette models without being forced to compete with outdated products.
The company's Velo Plus moist nicotine pouch is the fastest-growing product in its category in the US. American consumers are showing a growing preference for moist pouches like Velo Plus over dry varieties like Zyn. Data indicates that with this product, BAT's US pouch market share doubled from 6.7% in 2024 to 16.2% in 2025. Spurred by the new FDA rule, Philip Morris recently launched a moist Zyn product in the US as well.
Shifting Investor Sentiment
Traditional dividend and value investors have always had a higher acceptance of tobacco stocks, attracted by the sector's high dividends and low valuations. Currently, the tobacco sector is also one of the few consumer staples areas able to maintain steady growth, while giants in alcohol and packaged foods generally face stagnant revenues.
This is attracting a broader range of capital back to tobacco. Research data shows that in 2025, 60% of investors excluded tobacco stocks from their portfolios, down significantly from 66% the previous year.
While debates persist about the health pros and cons of e-cigarettes, most public health experts agree they are far less harmful than traditional cigarettes. Similarly, the logic of capital markets in viewing tobacco companies has also undergone a transformation.
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