In 1957 the S&P 500 was published for the first time. Jeremy Siegel later asked a simple question about that original list: if you had bought all 500 and gone to sleep, which one would have treated you best?
The answer was Philip Morris.
Not an oil major, not IBM, not a bank. A cigarette company — compounding at 19.75% a year through 2003, against 10.85% for the index itself. Nearly nine points a year, for forty-six years, from the least fashionable business in America.
Siegel’s explanation is the part that matters, and it isn’t “cigarettes are a great business.” It is that the market kept pricing the company for its lawsuits and its decline, and the company kept paying dividends anyway. Every quarter, those dividends bought more shares at a price set by people who wanted out. Nobody was excited. That was the whole point.
That is a seventy-year-old lesson about a category most portfolios still avoid. We wouldn’t act on it alone. What changed is that the category stopped being a museum piece.
What the news desk turned up
The Journal ran the sector on July 10 under a headline that did the work for us: tobacco stocks are coming in from the cold. British American Tobacco has roughly doubled in two years — a better run than the Magnificent Seven. Altria is up more than 50%.
The reason isn’t nostalgia for cigarettes. North American cigarette volumes have fallen by a third since 2020, per Jefferies. The money is moving to pouches and vapes, and that is a different business with different economics.
Philip Morris is the furthest along: 41% of 2025 sales were already non-combustible — IQOS abroad, Zyn in the United States, where PMI sells no cigarettes at all. Its pouch business grew 36% last year. Pouches went from 4% of the U.S. oral nicotine market in 2019 to 44% five years later.
BAT is where PMI was in 2019 — about a fifth of revenue smokeless, targeting half by 2035 — and 2019 is precisely the year PMI’s valuation began to separate from the pack. BAT’s U.S. pouch share went from 6.7% to 16.2% in a single year on the strength of Velo Plus.
And the buyers are coming back. In 2025, 60% of investors excluded tobacco from their portfolios, down from 66% the year before, per the US Sustainable Investing Forum. Funds that were contractually forbidden to own these companies are, one mandate at a time, allowed again. That is a slow, mechanical bid.
What we did about it
On July 10 we wrote that BTI was under evaluation and that doubles get evaluated, not chased. That was the right call for that day and it is not a position we can hold forever without either buying or walking away.
We bought — small, deliberately, and funded from cash rather than by selling anything we believe in.
| Where | Sleeve | Funded from |
|---|---|---|
| Dividend & income books | MO + PM + BTI, 4.5–6.0% combined | Short-term treasuries (SGOV), broad dividend ETFs |
| Midterm Dividend $50K–$500K | PM 2.00% + BTI 1.50% | SGOV |
| Conservative & scenario books | PM 1.50% + BTI 1.00% | SGOV |
| Diversified & global books | PM 1.25% (+ BTI where international) | SGOV, developed/EM index sleeves |
| Halal book | Excluded — permanently | — |
The sizing is the argument. A 1–2% position is large enough that a re-rating shows up in a client’s statement and small enough that being wrong about it is an inconvenience rather than an event. We funded it from the cash line because cash yielding roughly 4% is the one holding in these books with no upside case at all.
It is excluded automatically wherever a client mandate prohibits it. No exceptions, no conversations, no “but look at the numbers.” A screen a client asked for is not a suggestion.
What would make us wrong
The regulatory tailwind is political, and political things reverse. The FDA’s new guidance — which lets manufacturers sell new pouches and vapes while their applications are still under review — is the single biggest driver of the re-rating. It arrived under an administration friendlier to the industry than the last two.
The Journal reported on May 22 that Reynolds American, BAT’s U.S. arm, donated $5 million to a political group aligned with the President shortly before the administration eased restrictions on flavored vaping products. Draw your own conclusion about durability. Ours is that a rule which can be written in a year can be unwritten in a year.
Second: the volume math is unforgiving. These companies have held revenue steady by raising prices into a shrinking pool of smokers. That works until it doesn’t, and the smokeless business has to be big enough to catch the fall. PMI has largely done it. BAT has not yet.
Third, and not a financial point at all: nicotine is addictive, pouches carry real cardiovascular and adolescent-development concerns, and roughly two-thirds of vape products sold in the U.S. are illicit imports. We are not going to pretend a portfolio decision settles that. Anyone who would rather not own this is right to say so, and we will build the book without it.
A tobacco sleeve is now in the dividend, income, midterm-dividend, conservative, diversified, global and scenario books — PM as the core position, BTI alongside it where the mandate fits, MO in the income books for current yield. Combined weight runs roughly 1% to 6% depending on the book.
Every dollar came out of the cash line or a broad index sleeve. No conviction holding was sold to make room. The halal book excludes tobacco permanently, and any client screen that prohibits it is honored automatically.
The thesis is Siegel’s, not a hunch: you are paid for the gap between what a business earns and what the crowd expects. The catalyst is the pouch transition and the slow return of institutional buyers. The risk is that the FDA giveth and the FDA taketh away.