FDA guidance re-rates tobacco stocks as smoke-free sales hit 43%

Tobacco companies that generate a fifth or more of revenue from vapes and nicotine pouches are being valued as growth stocks, not dividend plays, after a regulatory shift opened the US market to new smoke-free products.

The FDA in May issued guidance allowing manufacturers to sell new vapes and oral nicotine pouches while their premarket applications remain under review, a policy change that effectively opens the US market to a new generation of smoke-free products and is already reshaping how investors value the industry's biggest names.

"The guidance removes a multiyear bottleneck that forced companies to compete with outdated products while illicit brands captured switchers," said James Okafor, macro analyst at Edgen. "It changes the timeline for the smoke-free transition from a question of if to a question of how fast."

Philip Morris International generated 41% of sales from non-combustible products in 2025, a share that rose to 43% in the first quarter of 2026. The stock trades at 21 times expected earnings, a 70% premium to both Altria Group and British American Tobacco, which sit near 12 times. PMI first crossed a smoke-free revenue share of 19% in 2019, the year its valuation began to diverge from peers. BAT now makes nearly a fifth of global revenue from smoke-free products, the same threshold.

The re-rating matters because it changes the capital-access math for the entire sector. Institutional portfolios that excluded tobacco on ethical grounds are easing back in: 60% of investors excluded tobacco stocks in 2025, down from 66% a year earlier, according to the US Sustainable Investing Forum. That 6-percentage-point swing represents billions of dollars in potential buying power flowing toward companies that can credibly claim a smoke-free future.

The Regulatory Mechanics Behind the Shift

The FDA's May guidance, titled "Enforcement Priorities for Certain New Tobacco Products Marketed Without Premarket Authorization," replaces previous enforcement discretion policies for vapor products and nicotine pouches. Under the new framework, the agency generally will not prioritize enforcement against unauthorized products if the manufacturer has a pending premarket tobacco product application that has been accepted and filed for scientific review. The policy also covers supplemental applications for modifications to already authorized products that have been pending for more than 180 days.

The practical effect is immediate. BAT can now sell its newest Vuse e-cigarette rather than compete with an older generation while its application languishes in review. Its Velo Plus moist pouch has already become the fastest-growing oral nicotine product in the US, helping BAT more than double its US oral nicotine pouch market share to 16.2% in 2025 from 6.7% in 2024, according to Jefferies data. Philip Morris responded by launching its own moist version of Zyn in the US market.

The FDA has indicated it will create a public-facing list of manufacturers and products that fall within the enforcement policy, a transparency measure the National Association of Tobacco Outlets has long advocated for. Products on the list remain unauthorized — only 26 nicotine pouch products and 45 vapor products have received full marketing authorization through the PMTA process — but the policy gives retailers a clearer framework for stocking decisions.

The Valuation Escape

The market is pricing a narrative about revenue mix, not current earnings. Altria and BAT throw off enormous cash and pay far fatter dividends than PMI, which is exactly why income investors have historically tolerated them. Yet PMI commands a 70% valuation premium because 43% of its revenue already comes from products that do not burn tobacco. The last time a major tobacco company crossed the 19% smoke-free threshold — PMI in 2019 — its stock began trading at a meaningful premium to rivals within the same year.

BAT is now at that same line. The company targets roughly half of sales from smoke-free products by 2035, a goal that requires winning back US vapers from illicit Chinese brands that Jefferies estimates account for more than two-thirds of the US vape market. The company is restructuring for the transition, cutting thousands of roles as it tilts toward smokeless. If the PMI pattern holds, BAT's valuation could begin to separate from Altria, which remains overwhelmingly a cigarette business.

The risk is that the regulatory goodwill that enabled this shift could reverse. A future administration could tighten the guidance as quickly as the current one loosened it. The entire smoke-free thesis still depends on selling an addictive product, which keeps a portion of institutional capital permanently on the sidelines and caps how far the re-rating can run. For now, the tobacco industry has engineered a valuation escape: turning an ESG liability into a growth premium without changing what goes in the customer's mouth.

This article is for informational purposes only and does not constitute investment advice.