Tobacco-makers are leveraging higher prices, some acquisitions and a growing portfolio of new smoke-free devices to offset declining cigarette businesses that executives and analysts believe will only further erode.

"This is a long-term trend," CFRA Senior Research Analyst Garrett Nelson said in an interview.

Cigarette shipments slowly burning away

Three of the five largest publicly traded tobacco companies — Altria Group Inc., Philip Morris International Inc. and Imperial Brands PLC — reported shipping fewer cigarettes in 2018 than a year earlier, extending previous declines, according to an analysis by S&P Global Market Intelligence.

Marlboro-maker Altria, which operates exclusively in the U.S., reported the largest decline in shipments at 5.8%, followed by Imperial Brands' 3.7% drop and Philip Morris' 2.8% decline. None of the shipment figures for the companies included next-generation products that are driving the business such as e-cigarettes and heated tobacco products.

Altria expects cigarette volumes to continue to drop by 4% to 5% a year through 2023, Chairman and CEO Howard Willard said during a Jan. 31 investor call.

That is above historical industry declines of 3% to 4% per year, Morgan Stanley Equity Analyst Pamela Kaufman said in an interview.

"This year you're seeing worse cigarette volumes. ... In 2019, I think that industry volumes will continue to decline at around 5%," Kaufman said. The growing popularity of e-cigarettes and other smoke-free products is contributing to the accelerated decline in combustible cigarette volumes, Kaufman added.

Aging smokers and younger tobacco users increasingly turning to smoke-free alternatives are driving the U.S. declines, CFRA's Nelson said.

Outside the U.S., cigarette volumes are remaining steady or dropping at a slower pace in developing markets, Nelson said. In those regions, smoke-free alternatives are generally more expensive and less available than cigarettes, Nelson said.

British American Tobacco PLC grew cigarette shipments by 2.2% in 2018 versus combined cigarette and heated tobacco shipments the previous year.

Executives credited the increase to the $60.98 billion acquisition of Reynolds American Inc. The U.K.-based British American Tobacco owned a 42.2% share of Reynolds, then the second-largest U.S. cigarette-maker, and reached an agreement in January 2017 to buy the rest of the company.

Japan Tobacco Inc. also pointed to acquisitions in Bangladesh and Russia in 2018 and other markets in the previous year to explain its own 3.6% volume increase, executives said in an earnings statement.

Pricing, new products cut through smoky declines

British American Tobacco posted the highest year-over-year revenue gain in 2018, reporting a 25.2% increase. The company again credited the Reynolds acquisition for the growth, though pricing and a near doubling of revenue from e-cigarettes and heated tobacco during the year also helped to offset cigarette declines, executives said Feb. 28.

Net of excise taxes, Japan Tobacco saw a 3.6% increase in annual revenue during 2018, Philip Morris grew revenue by 3.1%, Imperial Brands grew by 0.8% and Altria grew overall revenue 0.7% in 2018. The revenue figures do include next-generation products such as e-cigarettes.

Price increases across cigarette portfolios and increasing revenue contributions from next-generation products generally caused the increases, executives said during conference calls discussing their fiscal 2018 performances.

"In 2018, our strong results confirmed that the pricing environment is still robust and that, globally, there are still opportunities to expand the profit pool of the tobacco industry," Japan Tobacco President and CEO Masamichi Terabatake said during a Feb. 8 investor call.

The companies offer little data in earnings statements on their e-cigarette and heated tobacco shipments. British American Tobacco reported 7.19 billion e-cigarette pods and heated tobacco unit shipments in 2018, versus 2 billion heated tobacco shipments in 2017. Japan Tobacco reported 2018 shipments equaling 2.8 billion cigarettes in "reduced-risk" products, which include heated tobacco and e-cigarettes.

Philip Morris grew heated tobacco shipments by 14.2% in 2018 to 41.37 billion, the company reported Feb. 7. About 9.6 million people across 44 markets use the company's heated tobacco devices, and Philip Morris is also awaiting approval from the U.S. Food and Drug Administration to launch the device in the U.S., executives said during a Feb. 20 presentation at the Consumer Analyst Group of New York conference.

Altria raised Marlboro prices by 10 cents per pack on average in September 2018 and 11 cents in February 2019, Wells Fargo Senior Analyst Bonnie Herzog said in a Feb. 20 note to clients. The company generally raises prices on its cigarettes every six months, Herzog said.

"Altria's been able to hold the line through price increases because cigs are one of the inelastic products anywhere in terms of demand," CFRA's Nelson said.

Including Altria's brands and those sold by others, average U.S. cigarette prices rose each month ranging from just more than 2% in mid-2014 to nearly 8% in early 2017, according to Consumer Price Index, or CPI, data from the Bureau of Labor Statistics.

In 2017, average prices accelerated to 7.8% in April compared to the previous year and remained above 6% year over year through March of 2018, according to the CPI data.

During the year, California boosted taxes by $2 per pack in April, according to data compiled by the Campaign for Tobacco-Free Kids. Meanwhile, U.S. territory Puerto Rico boosted per-pack taxes by $1.70 in May, while Rhode Island and Delaware each added 50 cents to the taxes collected for each pack sold and Connecticut added 45 cents, according to the organization.

Outside of price increases, Altria is also betting its 35% stake in e-cigarette startup Juul Labs Inc. and 45% stake in Canadian cannabis producer Cronos Group Inc. will pay future returns, executives have said.