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

Investing Articles

At 7x forward earnings, this could be the FTSE 100’s biggest winner in 2025

Many of us will be considering which stocks will rise to the top of the FTSE 100 in 2025. Dr…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
US Stock

Warren Buffett has owned this stock for 60 years. Should I buy it today?

Jon Smith takes a look at one of the earliest stocks that Warren Buffett bought and muses over whether he…

Read more »

Young Black man sat in front of laptop while wearing headphones
Investing Articles

After a 50% decline in Q4, is now the time to buy Vistry shares?

Stephen Wright thinks a falling share price could be his chance to buy shares in a UK housebuilder with a…

Read more »

Burst your bubble thumbtack and balloon background
Investing Articles

Nvidia stock: a modern-day digital tulip bubble?

With Nvidia stock up over 2,200% in 5 years, Andrew Mackie assesses whether it’s in bubble territory, or fairly priced.

Read more »

Growth Shares

3 reasons why the hottest FTSE 100 sector last year could struggle in 2025

Jon Smith explains why the roaring returns from one FTSE 100 sector last year might not continue due to valuations…

Read more »

Investing Articles

The only UK stock I own at the start of 2025

As 2025 begins, Muhammad Cheema looks at his favourite UK stock. He also discusses why it’s the only one he…

Read more »

Dividend Shares

3 UK dividend growth shares to consider in 2025 for rising passive income

Picking the right dividend shares can potentially generate a rock-solid income stream that continually gets larger over time.

Read more »

Investing For Beginners

2 UK stocks that could be impacted if the US introduces trade tariffs

Jon Smith looks at the UK stocks that could come under pressure this year if the US starts to adopt…

Read more »