BACKGROUND: The tobacco industry is, quite correctly, perceived as very profitable and economically powerful. However, the share price performance of any company is determined by changes in sales and profits, and future prospects, rather than by its absolute size. Organisations like Tobacco Free Portfolios argue that, if asset management companies avoid investing in tobacco companies, this will weaken them and reduce their influence. In this research we consider the financial and operational performance of nine leading listed global tobacco companies, and assess the financial rationale for investing in, or divesting from them.
METHODS: Using data sourced from Bloomberg from 2008 to 2023, and to be updated to include 2024, we evaluate historical sales volumes, real revenue, real gross profit per cigarette, stock performance and price-to-earnings trends for nine leading listed global tobacco companies.
RESULTS: Before 2016, share prices of cigarette companies greatly outperformed the share prices of other companies on their respective stock exchanges. However, since 2016, cigarette companies' shares have substantially underperformed the market.
Since 2008, global cigarette sales volumes have declined steadily. Before 2016, most companies were able to increase the real net-of-tax price to offset the decrease in the volume of cigarettes sold. This has become increasingly difficult since 2016. Excluding inorganic growth, six of the nine companies experienced real revenue declines since 2008. Despite efforts to diversify towards novel products, revenues from these products remain small, and cigarettes remain the primary revenue source.
CONCLUSIONS: Tobacco companies have experienced rapidly deteriorating financial performance since 2016, amidst ever-escalating regulation. It remains unclear whether the growth in novel products will mitigate the decline in cigarette sales. This uncertainty poses heightened risks for investors. While the moral reason to disinvest from tobacco shares is well-established, the research indicates that the financial rationale for investing in the tobacco industry is questionable, at best.