May 2026: Most Tobacco Companies Receive Stronger Business Profile Assessments
In a recent credit commentary, Fitch Ratings noted that most global tobacco companies received stronger business profile assessments following updates to its Corporate Rating Criteria. The revised criteria resulted in rating upgrades for British American Tobacco (BAT, A-/Stable) and Altria (BBB+/Stable), while increasing headroom within the existing rating category for Philip Morris International (PMI, A/Stable). Fitch’s assessment of Imperial Brands (BBB/Stable) was unchanged.
Fitch’s stronger business profile assessments reflect the tobacco industry’s resilient market positions, strong profitability, robust cash flow generation, and generally conservative financial policies despite ongoing structural pressure on combustible tobacco volumes. Global tobacco demand remains structurally resilient even as cigarette consumption declines, as companies continue to offset volume weakness through pricing power and a growing focus on smoke-free products such as heated tobacco and nicotine pouches.
BAT’s improved assessment reflects its global scale, diversified geographic and brand portfolio, and strong growth potential in next-generation products, all of which support greater debt capacity consistent with a higher rating. Altria’s February rating upgrade was supported by its leading U.S. cigarette franchise, conservative leverage profile, disciplined capital allocation framework, and ability to generate consistently strong profitability and cash flows despite regulatory pressures and secular declines in cigarette volumes.
For PMI, the revised assessment increased Fitch’s leverage tolerance by 0.5x, providing comfortable headroom beginning in 2026. Fitch expects robust and sustainable earnings growth to reduce PMI’s leverage to 2.0x by the end of 2027 from 2.6x in 2025.
Fitch expects global tobacco companies to perform strongly in 2026, with the Iran conflict and other geopolitical challenges expected to have limited impact on the sector. Most companies are targeting mid-single-digit organic growth in revenue and operating income this year, driven by smoke-free products and supported by favorable regulatory frameworks in several markets. In addition to revenue growth, companies continue to pursue productivity and efficiency initiatives aimed at expanding margins.
Tobacco companies with greater exposure to the U.S. market are likely to continue facing regulatory pressure and weak enforcement against illicit vapor products in 2026. Fitch estimates that illicit products account for roughly 70% of the U.S. vapor category and have slowed the industry’s ability to monetize the transition from combustibles to smoke-free products.
Major tobacco issuers have reported strong first-quarter and first-half FY26 results and have maintained their full-year guidance. Their performance has remained more resilient and consistent than that of many other consumer sectors, including packaged food, consumer goods, and luxury companies, which have reported more mixed results.
The impact of the Iran conflict has so far primarily been limited to weaker duty-free sales in the Middle East, which represent only a small portion of global tobacco sales. Fitch also noted that weaker consumer spending could accelerate the ongoing shift toward discount cigarettes in the U.S. Larger tobacco companies, however, are generally well positioned to manage this trend through revenue growth management and targeted portfolio offerings aimed at retaining price-sensitive smokers within their brand franchises.
September 2024: Business Risk Profiles of Tobacco Companies Differentiated by RRP Success
In a credit commentary, Fitch Ratings underline that business risk profiles of global tobacco companies are increasingly differentiated by the successful development of Reduced-Risk Products(RRPs) – Smoke-free Products (SFPs) – Next-Generation Products (NGPs), which offer growth potential for the industry and help mitigate declining cigarette sales volumes1.
fourAccording to Fitch, tobacco companies focus on implementing NGP strategies, including vapor, heat-not-burn and oral nicotine offerings for revenue and profit growth, although the industry retains good pricing power in combustible products.
Specifically,
– Philip Morris International (PMI) is now an NGP leader thanks to the success of its heat-not-burn IQOS brand, and more recently with its ZYN brand in the oral product category
– British American Tobacco (BAT) also offers a full portfolio of NGPs. It has had more pronounced success in the e-cigarette category with its leading Vuse brand, while its oral product brand Velo has also experienced strong revenue growth
– Altria’s main long-term rating risk is related to developing a smoke-free product portfolio that maintains long-term nicotine share amid regulatory, competitive and consumer uncertainties. Altria will need to generate top-line growth and contribution margins that are at least on a par with existing mature tobacco brands to support stable cash flows as its portfolio migrates. Altria’s innovation pipeline for smoke-free products is improved following announcements in e-vapor, oral nicotine pouch and heated tobacco, which should double the company’s NGP revenue contribution by 2028. Nevertheless, Altria and other US manufacturers have made more limited progress in transitioning tobacco portfolios to smoke-free products compared to other international markets due to the US regulatory environment and enforcement issues for illegal e-vapor products.
– Imperial Brands is the smallest of the five international companies (including Japan Tobacco), and while it had invested in a broad profile of NGP products, it has pared down product launches, focusing predominantly on its core combustible markets. Imperial is likely to implement a much more targeted follower strategy in NGPs in markets where the category has established demand.
Fitch anticipates a moderate expansion of global tobacco companies’ profitability in 2024-27 as heavy investments into NGPs start paying off, with non-combustibles starting to contribute to profits (particularly, for BAT and PMI) and ongoing cost-optimization programs supporting the bottom-line.
Fitch expects ratings across the peer group to be continuously driven by capital allocation priorities and financial discipline, rather than operating performance. Sector ratings are underpinned by strong operating cash flow generation and comfortable rating headroom for most companies, except PMI, which has delayed deleveraging following the Swedish Match acquisition. Fitch also expect further deleveraging from BAT in 2025, building up rating headroom to a similar level to Imperial Brands and Altria.
Fitch thinks that the already quite consolidated nature of the industry is likely to restrain large-scale transformative M&A in the sector, with potential for inorganic growth remaining mainly in emerging NGP categories and partnerships in adjacent fields, such as medicinal-oriented products, including cannabis and oral consumption technologies.
References:
