Global tobacco giant Philip Morris International (PM) shocked the world a few years ago when it declared it would pursue a smoke-free future. After reporting fourth-quarter earnings, the haze is clearing and the future is arriving fast.
The reduced-risk portfolio of products that include products like its IQOS heated tobacco electronic cigarettes and Zyn nicotine pouches, helped drive revenue and profits higher, surpassing Wall Street estimates.
Although Philip Morris still derives the vast bulk of its revenue from traditional cigarettes, here are the top three reasons this tobacco stock deserves a place in your portfolio.
Although smoking is in a secular decline in the U.S., cigarettes remain popular globally. And especially in markets where smoke-free products are not permitted, sales volumes continue to rise.
Because of the addictive nature of nicotine, smokers keep returning even as prices rise. Q4 revenue was up 6% for the segment resulting in higher gross profits that rose nearly 11%.
Philip Morris' portfolio of brands, including Marlboro, enjoyed market share gains. Cigarettes represent 60% of total quarterly revenue, or $5.8 billion. They account for almost 60% of gross profits, as well.
For the full year, cigarettes account for 61% and 60%, respectively of revenue and gross profits. However, it highlights the tremendous growth of smoke-free products as five years ago, cigarettes represented more than 81% of Philip Morris International's revenue.
Philip Morris International was created in 2008 by the break up of Philip Morris Companies. PM would have the global rights to the former parent company's tobacco products, notably the Marlboro brand, while Altria (MO) had the U.S. rights to the product.
So Philip Morris International doesn't sell traditional cigarettes in the U.S. However, through acquisition of Swedish Match, a maker of oral, smokeless products like Zyn, it gained a presence in the U.S.
When it developed the IQOS heat-not-burn tobacco e-cig, which became even bigger than cigarettes in Japan (the first country it was sold in), and gained a large footprint throughout Europe and elsewhere, it partnered with Altria to market it in the U.S.
But it ran into charges of violating patents held by British American Tobacco's (BTI) Vuse brand of e-cig and was withdrawn from the market.
Zyn, though, is the top-selling nicotine pouch in the U.S. and the market for pouches is growing. It got big PR boost during the Senate confirmation hearings of Robert F. Kennedy Jr. when he popped a pouch in his mouth during the proceedings.
It wasn't the Zyn brand he used, but it highlights their growing popularity. U.S.shipments of Zyn reached nearly 165 million cans, up 42% from last year. Outside the U.S., shipments nearly doubled.
Together with IQOS, shipments of oral smoke-free products exceeded 40 billion units for the first time increasing revenue by 14% and boosting gross profits by nearly 19%.
The third reason Philip Morris International deserves a spot in your portfolio is for its dividend. It has made a payout to shareholders every year since it began trading in 2008. Moreover, it has increased the payout every year since then.
Unlike Altria, which targets a dividend payout ratio of around 80%, Philip Morris' doesn't have a particular range. Its strategy is to reward shareholders while also investing in future growth, particularly in the transition from traditional cigarettes to reduced-risk products.
It seeks to balance returning capital to shareholders with retaining enough earnings for reinvestment in the business.
But dividend growth stocks are what investors should look for. These are companies that consistently raise their payouts year after year, often at a healthy clip, while having the financial means to support the dividend.
Studies have repeatedly shown dividend stocks have outperformed non-paying stocks by a wide margin for nearly 100 years.
Less obvious is that stocks that initiate a dividend and increase the payout are the best performers. Data from the Hartford Funds shows that between 1973 and 2023, dividend growth stocks generated annual average returns of 10.2% compared to 9.2% by stocks that simply paid a dividend.
In 2013, Philip Morris' dividend was $3.58 per share a year. Last year it was $5.14 per share. Last September, it raised the payout again by 3.8% bringing the annualized dividend rate to $5.40 per share.
With the growth of its smoke-free portfolio and the continued strong profitability of its traditional cigarette brands, in a few years PM stock should attain Dividend Aristocrat status, or a stock on the S&P 500 index that has raised its payout for 25 consecutive years.
