Tobacco stocks: divisive sector, defensive strategy, deep value

Tobacco may never be fashionable. It sits firmly in the so-called “sin sector”, shunned and avoided by certain sections of the investment community (and for valid reasons). But when markets become unsettled, it has a habit of proving its worth.

In 2025, Panmure Liberum argues that tobacco is one of the most compelling stories in the UK market, a rare mix of value, income and resilience at exactly the moment investors are beginning to look for it.

Shares in British American Tobacco PLC (LSE:BATS) and Imperial Brands PLC (LSE:IMB) are up more than 40% over the past year.

Despite that recovery, Panmure Liberum says both companies remain undervalued and still offer double-digit returns, both in yield and re-rating potential.

Why this is not 2008... and why that matters

Crucially, the broker draws a distinction between now and the 2008 financial crisis. That downturn brought broad-based deleveraging, a freeze in liquidity, and risk aversion so extreme that even defensive stocks sold off. Tobacco was not spared.

Today’s conditions look more like the year 2000, when the dotcom bubble burst, the Panmure research asserts.

Then, as now, the correction came not from a financial collapse, but from a recalibration of valuations.

Investors rotated away from high-growth, high-expectation names back into reliable cash-generating businesses with strong pricing power and real earnings. Tobacco led the market in that period, and Panmure thinks the same pattern is now re-emerging.

British American Tobacco: absorbing the shock, resetting expectations

BAT trades on a forward earnings multiple of just 6.2 and yields over 10%. The group has already taken £27 billion in impairments to reflect regulatory setbacks in the US, notably around menthol bans and reduced-risk products.

That reset, says Panmure, has cleared the decks for a more credible forward strategy.

A key driver of future growth lies in “new categories” (vapour products, heated tobacco and nicotine pouches which now contribute more than £3 billion in revenue. These are on course to become profitable and could eventually represent half of total industry sales.

That transition is underappreciated in the valuation, the broker believes.

Imperial Brands: yield, discipline and selective growth

Imperial’s approach is more straightforward. It is prioritising income and capital return over market share or category leadership. Its shares yield close to 9%, and the group has returned over £3 billion to shareholders in just three years.

Panmure Liberum calls Imperial a “cash machine” and sees it as ideally placed to serve investors seeking dependable returns.

The group is investing selectively in next-generation products where the economics make sense, but avoiding the temptation to overextend. That discipline, the broker argues, is now being rewarded.

Regulatory risks are no longer crowding out the investment case

Perhaps most significantly, the sector has absorbed a fresh bout of regulatory pressure in the US, including new tariffs on Chinese-made vapour products.

These levies, proposed by the Biden administration and designed to mirror broader trade tensions with China, had the potential to inflate input costs across the industry and disrupt supply chains.

But the market’s reaction has been relatively muted. According to Panmure, this shows how much bad news was already priced in; and how far sentiment has recovered.

For a sector once acutely sensitive to headlines, the ability to shrug off tariff fears marks a meaningful change.

Reappraisal in a changing market

Panmure forecasts total returns from the sector of more than 10% over the next year, with income doing much of the heavy lifting.

More importantly, the market is beginning to revisit its assumptions. Tobacco still has powerful brands, high margins and pricing power. Next-generation products are gaining traction. And most of the regulatory damage has already been reflected in share prices.

In a world where rate cuts are slow to arrive and geopolitical noise remains high, investors are rotating into companies that offer consistency, and tobacco still fits the bill.

Tobacco: the defensive trade that works when the cycle turns

This is not a call for a new golden age of tobacco. It is a recognition that when the market turns cautious, the case for high-yield, cash-rich businesses with pricing power strengthens. That was true in 2000, when defensives led the rebound. It is proving true again in 2025.

Both BAT and Imperial offer compelling income, still-modest valuations, and improving clarity on future growth.

For those looking to rebalance portfolios away from overstretched tech, Panmure makes the case that it’s time to look again at one of the market’s most persistent survivors.