Cigarette manufacturer Imperial Brands’ (IMB) latest first-half results help explain why tobacco has been among the best performing sectors year-to-date.

While the company took a £225 million hit to profit associated with its exit from Russia, investors were more interested in heated tobacco and e-cigarettes growth and the positive reaction helped drive its share price to a two-year high.

Imperial Brands also demonstrated its pricing power, which is one of the reasons investors have been increasingly keen on tobacco stocks in an inflationary environment. The FTSE 100 company pushed through price increases of 3.8% in the second quarter.

As nicotine is addictive, the industry is typically able to lift the cost of a packet of cigarettes without unduly impacting demand.

Takeover activity has also helped give the sector a lift, with Philip Morris (PM:NYSE) recently agreeing a $16 billion deal to buy Swedish Match (SWMA:STO). The latter’s products are smoke-free, illustrating how tobacco firms are keen to diversify away from cigarettes.

This is a key plank of Imperial Brands’ five-year strategy, along with a focus on its core geographic markets of the US, UK, Germany, Spain and Austria.

Imperial Brands’ counterpart British American Tobacco (BATS) is set to update on first-half trading on 9 June.

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