Shares in FTSE 100 tobacco companies come with some eye-catching dividend yields. And I think theyâre worth considering seriously for investors seeking passive income.
Cigarette volumes might be in more or less terminal decline, but this might not be a problem for British American Tobacco (LSE:BATS) and Imperial Brands (LSE:IMB) given their moves into new product areas. But which is undergoing this transition more successfully?
Beyond cigarettes
Dividend yields of 8.3% from British American Tobacco and 7% from Imperial Brands are high by anyoneâs standards. And this action to keep shareholders happy arguably reflects the declining industry they operate in.
The decline of cigarettes doesnât have to mean the end of tobacco companies, though. Elsewhere in the industry, Philip Morris (NYSE:PM) is demonstrating this impressively.
The company has been having a lot of success in growing its next-generation products, which now account for 36% of overall sales. The most successful of these has been ZYN â its nicotine pouches.
Philip Morris is expecting 60% annual growth from ZYN going forward. And while some recent issues have opened the door for competitors, the overall growth picture is clear enough.
The future for tobacco companies is about such next-generation of products, especially nicotine pouches. So the issue is which of the UK firms is in the best position to make the most of this.
Market positioning
There are a few reasons I have British American Tobacco firmly ahead on my scorecard. The first is that its own nicotine pouch â called Velo â is the leading product in its category outside of ZYN.
Velo has a strong presence across Europe and the Americas and generated £539m in sales during 2023. Thatâs more than the entire next-generation products division at Imperial Brands.Â
British American Tobacco clearly has the bigger market share, but to some extent this reflects the fact itâs a larger company. Even as a proportion of total revenues, though, itâs still ahead.
With Imperial Brands, next-generation products account for around 6.8% of total revenues. At British American Tobacco, that number is 12.26%.Â
To my mind, this indicates that one company is significantly ahead of the other at the moment. If the future for tobacco companies is smokeless products, I think thereâs a clear leader.
Long-term growth
Both British American Tobacco and Imperial Brands are expecting strong growth from their smokeless products. Thatâs partly because the market for these is expected to grow significantly.
If next-generation products are going to justify the current market cap of either company, there had better be a lot more to come. But the recent performance of Philip Morris gives reason for optimism.
Neither of the UK companies has a product that has been as spectacular as ZYN. But British American Tobacco comes closest with Velo.
More generally, I think the business is further ahead in the race to transition to the new world of non-tobacco products than Imperial Brands. Thatâs why itâs the stock Iâd choose for long-term passive income.
The post Imperial Brands vs British American Tobacco: which should investors prefer for long-term passive income? appeared first on The Motley Fool UK.
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Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco P.l.c. and Imperial Brands Plc. 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.
