Why tobacco companies offer more retirement potential than pharma stocks

The tobacco industry could experience significant growth which may help it to outperform a range of pharma stocks.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

In recent years, the tobacco sector has lost its appeal for a number of investors. The industry has experienced major regulatory change and a shift in consumer tastes that have contributed to a decline in cigarette volumes. As such, the future growth potential of tobacco products may seem to be somewhat limited.

In contrast, there seems to be a clear growth catalyst for pharma stocks. An ageing world population is set to demand increasing quantities of treatments for a variety of conditions, and this has the potential to improve profitability across the sector.

However, in the long run the tobacco industry could be a surprisingly strong performer. It could even offer greater retirement potential than the pharma sector.

Changing industry

While cigarette volumes have been on a downward trend in recent years, this is being offset by rising demand for next generation products. E-cigarettes are perhaps the most widely available reduced risk product at the present time, and they have appealed to tobacco users seeking to adopt a healthier lifestyle.

Investment in the next generation products space is significant. The world’s major tobacco companies have exposure to it through various brands, while product development means that the segment is likely to expand rapidly over the coming years. For example, British American Tobacco is forecasting a five-fold increase in sales from next generation products over the next five years. If met, this would make the segment a significant contributor to the company’s earnings, and could mean that it offsets the difficulties which may be experienced in tobacco products.

Further potential

Looking ahead, regulatory change and a shift in consumer demand towards reduced risk products is likely to mean a fall in cigarette volumes over the medium term. However, the pricing power of major brands means that tobacco products are likely to deliver rising profitability in future years. In fact, this has been the situation within the industry in recent years, with falling volumes being offset by price rises.

Furthermore, the world’s population is expected to increase by 13% over the next 13 years. This could mean that cigarette volume declines are less pronounced than many investors are currently anticipating. It could also mean that the potential market for next generation products increases, which could support higher sales and profitability in the long run.

Risk/reward

Although investing in the tobacco industry may seem risky due to declining cigarette volumes, the sector appears to have strong growth potential. Alongside the pharma industry, it could help an investor to successfully plan for retirement.

Since many of the world’s tobacco companies currently trade on relatively low valuations, they could offer wider margins of safety as well as greater upside potential than many of their pharma sector peers. As such, they appear to offer superior risk/reward ratios at the present time.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares of British American Tobacco. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Midnight is celebrated along the River Thames in London with a spectacular and colourful firework display.
Investing Articles

Can I turn £10k into a £1k passive income stream with UK shares?

Everyone talks about the magical 10% mark when it comes to passive income investing, but how realistic is it to…

Read more »

Investing Articles

3 market-beating international investment funds for a Stocks and Shares ISA

It always pays to look for new ways to add extra diversity to a Stocks and Shares ISA. I think…

Read more »

Grey cat peeking out from inside a cardboard box in a house
Investing Articles

Just released: April’s latest small-cap stock recommendation [PREMIUM PICKS]

We believe the UK small-cap market offers a myriad of opportunities across a wide range of different businesses and industries.

Read more »

Fireworks display in the shape of willow at Newcastle, Co. Down , Northern Ireland at Halloween.
Investing Articles

The Anglo American share price soars to £25, but I’m not selling!

On Thursday, the Anglo American share price soared after mega-miner BHP Group made an unsolicited bid for it. But I…

Read more »

Investing Articles

Now 70p, is £1 the next stop for the Vodafone share price?

The Vodafone share price is back to 70p, but it's a long way short of the 97p it hit in…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

If I’d put £5,000 in Nvidia stock at the start of 2024, here’s what I’d have now

Nvidia stock was a massive winner in 2023 as the AI chipmaker’s profits surged across the year. How has it…

Read more »

Light bulb with growing tree.
Investing Articles

3 top investment trusts that ‘green’ up my Stocks and Shares ISA

I’ll be buying more of these investment trusts for my Stocks and Shares ISA given the sustainable and stable returns…

Read more »

Investing Articles

8.6% or 7.2%? Does the Legal & General or Aviva dividend look better?

The Aviva dividend tempts our writer. But so does the payout from Legal & General. Here he explains why he'd…

Read more »