06 Jun 2023

Tobacco Is a Trusty Inflation Hedge. Here’s a U.K. Name to Play.

Stockholders have had a rough time this year, with surging inflation and fears of a recession. But there is a way to mitigate it: tobacco stock Imperial Brands .

The company (ticker: IMB.UK) offers potential total returns above 22% over the next 12 months, some analysts say. It markets cigarette brands including Winston, JPS, L&B, and Gauloises, and rolling paper Rizla. It is also developing next-generation products, or NGPs, which include vaping materials and oral nicotine.

Imperial Brands “is at the early stages of rebuilding a culture of boring reliability under its new CEO,” according to a report by RBC Capital Markets. In other words, the business is stable and not likely to produce unexpected shocks.

RBC sees the stock headed to 22 pounds sterling a share ($25.52), up 17% from its recent price of £18.95. On top of that, its annual dividend is projected at £1.40, or 7.4%. That hefty payout helps make the stock attractive during these turbulent times.

Garrett Nelson, an analyst at CFRA in Richmond, Va., says the category as a whole has historically “been one of the most recession-resistant industries.” Indeed, Imperial’s stock has rallied 17% this year. Over the same period, the FTSE 100 index, which tracks the largest U.K.-listed stocks, and the S&P 500 index, fell 3.2% and 17%, respectively.

The stock remains cheap, trading at 6.8 times forward earnings, which is lower than its five-year average forward price/earnings multiple of 7.5, according to Morningstar data.

At least part of the reason for the low P/E is that many institutions, especially those adhering to environmental, social, and corporate governance principles, refuse to buy tobacco shares. That practice, which is becoming more widespread, means their prices will likely remain cheap, relative to the broader market.

While cigarette smoking is waning in developed markets, such as the U.S. and Europe, the decline in sales volumes is partially being offset by higher unit prices and cost-cutting.

“Unit sales are declining in developed markets, in terms of the number of sticks [cigarettes] sold,” says Steve Clayton, a fund manager at U.K.-based HL Select. “Instead, the company is concentrating on less-developed markets.” These include South America, Africa, and Asia.

The NGP segment has shown some strength, with revenue growing 8.7% in the first half of the year, versus 0.1% for tobacco products. In all regions, the tobacco revenue dwarfs that produced by NGPs. The question is how fast the latter will grow and whether it will outpace the decline in the traditional tobacco business.

“If you are an investor in tobacco, you want to find a business that has got as durable as possible a cash flow coming out of the traditional business to support the growth in the new business,” Clayton says.

Imperial isn’t the only tobacco choice for investors in European stocks. Clayton points to British American Tobacco (BATS.U.K.) as an alternative that might suit longer-term investors looking for growth at the expense of dividends. British American markets brands such as Lucky Strike, Camel, and Dunhill, all well-known in the U.S.

And BATS is betting big on the future of new products. “BAT has a strong portfolio of next-generation products,” Clayton says.

The trade-off is a lower yield. British American has a projected dividend of 6.3%, which is less than Imperial’s. It also has a higher forward P/E of 9.5, versus imperials 6.8. “You get a slightly lower yield, but greater confidence in growth,” Clayton says.


The global tobacco market was worth around 8.1 per cent million tons in 2017 growing at a CAGR of 2.3 per cent during 2010-2017.

  • Definition / Scope
  • Market Overview
  • Market Risks
  • Top Market Opportunities
  • Market Trends
  • Industry Challenges
  • Technology Trends
  • Pricing Trends
  • Regulatory Trends
  • Market Size and Forecast
  • Market Outlook
  • Competitive Landscape
  • Kay Market Players
  • Strategic Conclusion
  • References
  • Appendix
Catalyst Talent Strategy Consulting

Definition / Scope

  • Tobacco industry comprises of companies involved in the manufacturing, sale, advertisement and distribution of tobacco products.
  • Tobacco is one of the most addictive substances in the world.
  • Tobacco products are prepared by curing the leaves of tobacco plant which is a part of the genus Nicotiana.
  • The popular forms of tobacco are cigarettes, cigars, electronic cigarettes, hookahs, and chewing tobacco.

Market Overview

Tobacco industry is one of the world’s most valuable fast moving consumer goods industries. This industry is a substantial contributor to the economies of many countries.

The industry is supporting the livelihoods of millions of people globally including retailers, farmers and those involved in the tobacco supply chain. On the other hand, more than 7 million people are killed each year because of tobacco. More than 6 million of those deaths are due to direct tobacco use while nearly 890,000 are due to non-smokers being exposed to second-hand smoke.

China is the world’s largest producer and consumer of tobacco accounting for almost half of the total global production. Among the tobacco products, cigarette accounts for the majority of the sales followed by roll your owns, cigars, cigarillos, smokeless, nicotine replacement therapy, electric cigarettes and pipes.

Market Risks

  • The tobacco industry volume has declined in 2017 due to rise in sale of illicit cigarettes and regulations. It is reported that 1 in every 10 cigarettes and tobacco products consumed globally is illicit. The illicit market is supported by organized criminal networks involved in human trafficking and arms.
  • The restriction on the manufacture, sale, advertising and packaging of tobacco products is increasing in nearly all countries and markets.
  • Increase in taxes leads to increase in the prices of tobacco. It is estimated that a tax increase that increases tobacco prices by 10 per cent decreases tobacco by about 5 per cent in low and middle income countries and 4 per cent in high-income countries. 32 countries representing 10 per cent of the world’s population have introduced taxes on tobacco products.
  • Strong brands image and distribution networks of existing and large players make it difficult for new entrants and smaller players to survive and compete in the market.

Top Market Opportunities

  • Millions of smokers around the world are switching to less harmful Next Generation Products (NGPs). There is opportunity for NGPs such as vapour and tobacco heating products as well as the oral tobacco and nicotine market. This market is expected to double between 2016 and 2021.
  • There are 1.1 billion smokers in the world. Around 80 per cent of those smokers live in low and middle income countries. Sales are shifting from developed markets like Western Europe to emerging markets like Asia and Africa. The tobacco industry can target these emerging markets. The main factors leading to demand shift in these countries are increasing population, lenient government regulations and rising income of the consumers.

Market Trends


The increased globalization of commerce has been one of the main drivers for increase in the size of tobacco companies. The erosion of national borders and the relative decline of the power of national governments relative to commercial organizations are leading the growth.

The growth of international business treaties are also helping the growth of the industry by resisting regulation and enabling companies to litigate directly with countries over such regulation.


The tobacco industry spends billions of dollars annually to advertise and market its product. As use of tobacco among women has not been that high as compared to males, women and minors have been the targets of many tobacco advertising and promotion. The exposure to tobacco advertising and promotion leads to higher consumption of smoking.


Cigarette manufacturers are coming up with innovative cigarettes such as smokeless cigarettes and e-cigarettes as alternative to conventional cigarettes. Smokeless and e-cigarettes are less harmful than smoking.

British American Tobacco has invested USD 1 billion in last five years for the development of smoke-free cigarettes. Further, numerous premium tobacco products such as flavored, long and skinny and coloured has created positive outlook for the growth of tobacco industry.

  • The bans on tobacco advertising and promotion can reduce tobacco consumption. 37 countries, representing 15 per cent of the world’s population have completely banned all sorts of tobacco promotion and advertising.
  • Around 75 per cent of lung disease deaths and 25 per cent of all heart diseases deaths are directly pointed to smoking irrespective of any other cause.
  • The availability of alternatives such as patches, gums and lozenges which helps to reduce craving hinders the growth of tobacco market.
  • Higher level of education along with rising level of awareness about health concerns has impeded the growth of tobacco industry.

Industry Challenges

High taxes

High tobacco product taxes lead to tax evasion. Also, high tax in tobacco products increases the prices of tobacco which in turn reduces the consumption of tobacco among consumers.

Illegal market

The illegal market for tobacco products is growing rapidly across many countries. It is estimated that over 480 billion cigarettes are sold illegally globally, leading to loss of billions in tax revenue.

Impact on health

The people working in tobacco industry are at risk of green tobacco sickness, an illness caused by absorption of nicotine through the skin from the handling of wet leaves. The public health is also affected by the globalization of tobacco marketing, trade, research and industry.

Technology Trends

The global usage of e-cigarette is rising exponentially. E-cigarette simulates the experience of smoking a traditional cigarettes.E-cigarettes are estimated to be 95 per cent less harmful than smoking.

The global e-cigarette market was worth USD 10.24 billion in 2017 and is expected to reach a value of USD 16.85 billion by 2023. This market is forecasted to grow at a CAGR of 8.1 per cent between 2018-2013.

Pricing Trends

The chart below shows the selling price for 20 packs of cigarettes in selected countries. Australia is the world’s most expensive country to be a smoker. The cost of one pack is almost €17.

Australia’s and New Zealand’s smokers are enviously eyeing Ukraine. There, they could get nearly 370 cigarette sticks for the same amount of money.

Regulatory Trends

The WHO Framework Convention of Tobacco Control (WHO FCTC) enforced in February, 2005 has 181 parties covering more than 90 per cent of the world’s population.

The main objective of this WHO FCTC is to protect the present and future generations from devastating health, social, environmental and economic consequences of tobacco consumption. MPOWER package was introduced in 2008, which is a package of six evidence-based tobacco control demand reduction measures that are proven to reduce tobacco use.

Market Size and Forecast

  • The global tobacco market was worth around 8.3 million tons in 2016 and 8.1 million tons in 2017 growing at a CAGR OF 2.3 per cent during 2010-2017.
  • About 6.5 trillion cigarettes are sold around the world each year or 18 billion cigarettes are sold per day.
  • There is an estimation of 1 billion smokers in the world.
  • Cigarette retail values were worth US$ 699.4 billion in 2017. Over 5.4 trillion cigarettes were sold to more than one billion smokers globally.
  • Between 2003 and 2017, the global cigarette volume sales shrunk by 1.3 per cent while retail values rose by 26.5 per cent.
  • The five largest cigarette consuming nations are China, Indonesia, Russia, US and Japan. These nations account for 61.7 per cent of the volume of all cigarettes sold in 2017.

Market Outlook


The global tobacco market is projected to reach a value of nearly US$ 9 billion by 2023.

Industry analysts estimates that by 2022 the global cigarette volume will decrease by 8 per cent and real value will shrink by 0.3 per cent.


Competitive Landscape


The cigarette sales are expanding to new markets. The industry market shares are consolidating and the market is controlled by few international companies. In 2001, around 43 per cent of global market sales were controlled by the five leading transnational tobacco companies.


By 2017, around 80 per cent of the market was controlled by these TTC. Over the last decade, the global cigarette market has been dominated by five companies namely China National Tobacco Corporation, Philip Morris International, British American Tobacco, Japan Tobacco and Imperial Tobacco Group. China, India and Brazil are the three largest tobacco producing countries.


Strategic Conclusion

The tobacco industry is one of the most profitable, dangerous, and deadly industries in the world. China is the world’s leading producer. The cigarette market is becoming more concentrated by few large players.

Tobacco industry creates employment opportunities for millions of people and provide tax revenue for the government. On the other hand, country suffers huge economic loss due to lost productivity due to illness, health-care costs and foreign exchange losses.

Source: Constable Simon (2 Sept 2022) 2018 © All Rights Reserved.