The taboo against owning cigarette stocks hasn't gone away, but new grey areas are emerging.
Companies that make a big share of their sales from smoke-free products like vapes appear to be rejoining polite society, and are getting a boost to their stock-market valuations as a result. Philip Morris International is already in this camp, and British American Tobacco might be on its way.
Investors who bought BAT shares two years ago have roughly doubled their money, a better run than the Magnificent Seven. All tobacco stocks have done well over the period, including Marlboro's U.S. maker, Altria Group, which is up more than 50%.
The second Trump administration is friendlier to the tobacco industry than the Biden White House, and even the first Trump administration. This has eased some of the regulatory risk that has clobbered tobacco shares since the U.S. Food and Drug Administration threatened a major crackdown on cigarettes back in 2017. Tobacco companies have also cut checks to the MAGA Inc. super political-action committee to try to fix some of the industry's long-standing bugbears.
BAT could be a big winner from recent changes to how the FDA will police smokeless nicotine products in future. The regulator issued guidance that effectively allows manufacturers to sell new vapes or oral nicotine pouches while their premarket tobacco product application, or PMTA -- a request to sell a new nicotine or tobacco product in the U.S. -- is being reviewed.
Previously, companies had to wait until their PMTA was approved before they could sell a new product, which could take years. This has made it difficult to capture consumers who were switching from cigarettes to smokefree nicotine products and allowed illegal products to fill the void. According to Jefferies, more than two-thirds of vape products in the U.S. are illicit, most of them imported from China.
The new guidance is controversial from a public-health perspective but will help tobacco companies to expand their smokefree businesses. This is important if they are to offset the long-term decline in U.S. smoking rates. The number of cigarettes sold in North America has fallen by a third since 2020, according to Jefferies analysts. So far, tobacco companies have been able to keep revenues steady by raising prices. This won't last forever as the pool of smokers is shrinking fast.
Another upside of having smokefree products is luring back institutional investors who had dumped the stocks for ethical reasons. Although tobacco is still one of the industries most likely to be shunned from portfolios -- along with weapons and fossil fuels -- some funds find it easier to justify owning shares in tobacco companies that are phasing out old-school cigarettes.
PMI generated 41% of its sales from noncombustible products in 2025, which makes it the market leader in smokefree products. Its biggest smokeless brand is IQOS heated tobacco sticks, which hasn't been fully rolled out in the U.S. yet, but is popular in Japan and Europe. PMI doesn't sell any cigarettes in the U.S. Its main brand in the American market is Zyn oral nicotine pouches. The company's shares change hands for 21 times expected earnings, a 70% premium to Altria and BAT.
BAT made nearly a fifth of its global revenue from smokeless products last year, including Vuse e-cigarettes and Velo oral nicotine pouches. Based on what happened to PMI, this is the level where valuations begin to diverge. PMI's smokefree sales reached 19% in 2019, which was the first year the stock began to trade at a significant premium to rivals.
BAT plans to make around half its sales from smokeless products by 2035. To get there, it needs to win back U.S. vapers from illicit brands. The FDA's new rules mean BAT can release its newest version of Vuse e-cigarettes rather than be forced to compete with an old generation.
The company already owns the fastest growing oral nicotine pouch in the U.S., Velo Plus. U.S. consumers are gravitating toward moist pouches like Velo Plus instead of Zyn, which is dry. This helped BAT more than double its share of the U.S. oral nicotine pouch market to 16.2% in 2025, up from 6.7% in 2024, Jefferies data shows. Because of the new FDA guidance, PMI recently launched its own moist version of Zyn in the U.S.
Income and value investors have traditionally been the least squeamish about owning tobacco shares. They are attracted by the industry's hefty dividends and cheap valuations. But tobacco stocks are among the few consumer staples companies that are turning out decent growth these days. Alcohol and packaged-food giants are struggling with stagnant sales.
This is causing a wider group of investors to take another look at tobacco. In 2025, 60% of investors excluded tobacco stocks from their portfolios, down from 66% a year earlier, data from the US Sustainable Investing Forum's survey shows.
The merits of switching to vaping are debated, but most experts agree it is preferable to smoking cigarettes. The same logic applies to tobacco stocks.
Write to Carol Ryan at carol.ryan@wsj.com
(END) Dow Jones Newswires
July 09, 2026 05:30 ET (09:30 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
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