Philip Morris International (NYSE: PM) shares have been largely range-bound over the past year, trading between $87 and $102. However, that could soon change, with the company seeing some attractive growth opportunities ahead.
Let's look at why investors should consider buying the stock today.
1. Smokeless opportunities
Philip Morris International has long been known for selling cigarettes, in particular its Marlboro brand, in markets outside the U.S., while Altria has retained the rights to sell Marlboro and other brands within the U.S.
International markets have generally held up better, with Philip Morris International able to solidly grow its combustible cigarette business through price increases against modest volumes declines. For example, in 2023 the company saw its combustible sales grow 5.5% organically on the back of an 8.9% increase in pricing.
However, it is the company's smokeless products, Zyn and Iqos, that should get investors excited. And while the company does not sell cigarettes in the U.S., it currently sells Zyn there and will soon have the rights to sell Iqos products in the U.S. as well.
Zyn nicotine pouches have become increasingly popular in the U.S. over the past few years. Philip Morris acquired the brand in 2022 when it bought Swedish Match for $16 billion in late 2022. The brand has been a big growth driver for the company, with it seeing U.S. volume growth of 62% in the U.S. in the fourth quarter.
Iqos, meanwhile, which heats tobacco instead of burning it, has also been growing for Philip Morris International. The company ended 2023 with 28.6 million Iqos users, an increase of 3.7 million from a year ago. An improvement with the heating component of the product through Iqos Iluma helped drive adoption.
The big benefit of Zyn and Iqos for Philip Morris International is that both products have much better unit economics than cigarettes, which means they are more profitable for the company. The tobacco giant has said that Zyn has a six times greater product contribution level than cigarettes, while Iqos has two times better unit economics. Smokeless products accounted for more than 39% of the company's revenue in the fourth quarter.
Philip Morris International will also have a big opportunity with Iqos in the U.S. after it bought back the U.S. rights from Altria. The company will soon do a test launch of the product in Austin, Texas, and has plans to test Iqos in four cities. The company is awaiting FDA approval for Iqos Iluma before a full-scale launch.
While entering a U.S. market where vaping is strong may not be easy, the big benefit for Philip Morris International is that each Iqos customer in the U.S. will be a new customer for the company, since it does not sell cigarette products in the U.S. In international markets, the company is generally converting cigarette customers to Iqos. As such, even modest success in the U.S. should be a solid growth driver.
2. An attractive, growing dividend
In addition to its growth opportunities, the other big reason to buy Philip Morris International stock is its attractive 5.6% dividend yield. The company has grown its dividend every year since it was spun off from Altria in 2008. During that time, it has increased the dividend by more than 180% to $5.20 a year.
In 2023, Philip Morris International generated $9.2 billion in operating cash flow, while it is looking to produce between $10 billion to $11 billion in operating cash flow in 2024. The company paid out nearly $8 billion in dividends in 2023. This shows that the dividend is well covered and will allow Philip Morris the ability to invest in its business, as well as pay down debt. The company ended 2023 with 3x leverage following its purchase of Swedish Match and the U.S. rights to Iqos, and it will look to take its leverage down to 2x by the end of 2026.
Given this performance, I would expect Philip Morris International to continue to increase its dividend each year moving forward. Meanwhile, after it reaches its leverage target, the dividend increases could become larger.
Image source: Getty Images.
A great stock to buy today
Philip Morris International offers a unique combination of a defensive consumer staples stock with a high dividend yield that offers strong growth opportunities. For 2024, the company is projecting organic revenue growth (which excludes the impact of acquisitions, divestitures, and currency movements) of between 6.5% to 8% and adjusted EPS growth, excluding the impact of currencies, of between 7% and 9%.
PM PE Ratio (Forward) data by YCharts
On top of that, Philip Morris International trades at a forward P/E of just over 14x, which is one of its lowest valuations in recent years. Given its growth opportunities in smokeless products and high dividend yield, now is a great time to buy the stock.
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Geoffrey Seiler has positions in Philip Morris International. The Motley Fool recommends Philip Morris International. The Motley Fool has a disclosure policy.
