2. Philip Morris International

While Altria has looked outside the company to diversify and cushion itself from the decline of cigarette sales, Philip Morris is counting on an in-house strategy. The company -- which sells many of the same brands that Altria does, except outside the U.S. -- has pinned its hopes on heat-not-burn (HNB) tobacco products, primarily its IQOS devices.

While the HNB process is similar to the process used by vaporizers and e-cigarettes, devices like IQOS use tobacco rather than the liquid that vaporizers use. By using tobacco, Philip Morris can use the same supply chain for IQOS that it would for traditional cigarettes. The company claims that HNB devices are safer than regular cigarettes because they don’t burn tobacco; however, the science is still being debated, and the FDA has not concluded that they are safer than cigarettes.

Considering what happened with Juul, IQOS runs a similar risk of regulatory crackdown internationally and in the U.S., where Philip Morris has partnered with Altria to sell it.

Like Altria, Philip Morris saw a decline in cigarette volume in 2019, about 4.5%, but volume sales of heated tobacco units rose 44.2%, showing the growth potential of IQOS, though sales of the product are still much smaller than sales of traditional cigarettes. The company also said it finished the year with an estimated 13.7 million IQOS users.

As a dividend stock, Philip Morris does not disappoint, either. The company has raised its dividend every year since it split from Altria in 2008, and as of the end of 2019, its dividend has increased 154%. Including its history as part of Altria, it would be a Dividend Aristocrat.

3. British American Tobacco

British American Tobacco has become a titan of the industry as well with the help of its $49 billion acquisition of Reynolds American in 2017. Today, the company owns a range of popular cigarette brands, including Camel, Newport, Dunhill, Natural American Spirit, and Lucky Strike, as well as next-gen products like Vuse for vaporizing and glo for HNB.

Like other tobacco companies, BAT is focused on transitioning to less risky next-gen products. Last year, the company saw a 4.7% decline in cigarette volume, though volume sales of tobacco-heated products rose 31.6%. Sales from new categories were close to $2 billion, but the vast majority of its revenue still comes from cigarettes.

The advantage of British American Tobacco over Altria and Philip Morris is that it gives investors exposure to the whole world, rather than just the U.S. or international markets, and to a wide range of products including cigarettes, vaporizers, chewing tobacco, and heated tobacco. It’s the closest investors can get to investing in the whole industry in one tobacco stock.

British American is also a generous dividend payer, and its high operating margin, which topped 30% in 2019, helps ensure the safety of its quarterly payout.