Tobacco stocks continue to dive on Tuesday morning following reports that President Joe Biden’s administration is mulling a cap on nicotine levels in cigarettes. Shares of British American Tobacco (NYSE:BTI) are leading pre-market declines, with BTI stock off about 3% at 8 a.m. Eastern.
The Biden administration is trying to determine if it should reduce nicotine levels in conjunction with a menthol ban or as a separate policy, people familiar with the matter told The Wall Street Journal. April 29 is a court deadline for the U.S. Food and Drug Administration to respond to a petition to ban menthols by revealing whether the agency intends to pursue such a policy.
Other tobacco stocks, including Altria (NYSE:MO), Philip Morris International (NYSE:PM) and Imperial Brands (OTCMKTS:IMBBY), are showing in the red this morning. MO stock lost 6% yesterday following the news report.
However, Jefferies analyst Owen Bennett sees the declines as a stock market overreaction, Barron’s reported. Why? To begin with, these regulatory changes are nothing new. The idea for a menthol ban has been around for at least eight years and the FDA considered a cap on nicotine under President Donald Trump too.
The analyst last month raised his rating on Altria to “buy” from “hold” and his price target to $58 from $40 per share. Despite a 6.17% loss on Monday, MO stock closed just above $49 a piece.
Tobacco Stocks Shunned by ESG Investors
Tobacco stocks have long been a favorite among income investors. They typically pay high dividend yields, often above 5%. A select few have also maintained long histories of raising their dividends, even during recessions. Cigarette makers have the ability to raise prices over time. Demand for tobacco products remains steady during economic downturns. And, the industry also benefits from high returns on invested capital as well as high barriers to entry.
Still, tobacco stocks are being shunned by a new generation of investors, millennials who want to invest with a conscience and embrace socially responsible investing (SRI) strategies. This has led to the rise of tobacco-free funds based on environmental, social and governance (ESG) principles.
Seeking to diversify their revenue streams, several tobacco companies have turned to cannabis as an alternative.
Earlier this month, InvestorPlace contributor David Moadel noted that British American was reported to be investing 221 million CAD in Canadian cannabis grower OrganiGram (NASDAQ:OGI) . At the time of the deal’s announcement, that equated to around $176.6 million. BTI will hold a whopping 19.9% stake in the cannabis cultivator.
On the date of publication, Robert Lakin did not have (either directly or indirectly) any positions in the securities mentioned in this article.
InvestorPlace contributor Robert Lakin is a veteran financial writer and editor, including previous stints with Bloomberg News, McKinsey & Co. and McDonald & Company Investments.