Philip Morris International Eyes Growth with Next-Generation Products
In a significant shift from its historic business model, Philip Morris International is embarking on a transformative journey as it delves deeper into the development and acquisition of next-generation products. Known primarily for its Marlboro cigarettes outside the U.S., the company now aims to stimulate growth and enhance stock value through innovation and diversification.
The stagnant phase that Philip Morris found itself in over the past five years, with stock values fluctuating but essentially mirroring its 2019 valuation, appears to be on the cusp of change. This comes as the tobacco behemoth focuses on alternatives considered less harmful than traditional cigarettes, such as the IQOS tobacco heating device and Zyn, an oral nicotine pouch.
Launched in 2014, IQOS has seen a robust adoption rate, boasting 28.6 million users and securing a 9.7% market share in the tobacco category across its available markets, trailing only behind Marlboro itself. With its anticipated launch in the U.S., Philip Morris is positioning itself to penetrate the estimated 28 million smoker market, thereby directly competing with Altria, the holder of the Marlboro brand in the States.
The acquisition of Swedish Match in 2022 was a strategic move that allowed Philip Morris to expand its foothold in the nicotine pouch sector by owning the leading Zyn brand. With Zyn shipments hitting 385 million cans in Q4 2023, marking a 62% year-over-year increase, the company discerns substantial growth potential in this product category.
Philip Morris's strategy aligns with its ambitious goal for next-generation products to constitute at least two-thirds of its total revenue by 2030, a sharp rise from 36.4% last year. This strategy taps into the global smoker population of over 1 billion, leveraging the company's established brands and extensive market access.
Concurrently, Philip Morris maintains a substantial 5.7% dividend yield, despite a 101% dividend payout ratio of cash flow due to hefty investments in Zyn. Supported by $3.1 billion in cash reserves and an investment-grade credit rating, the firm's commitment to its dividend remains unwavering.
With the stock trading at a forward P/E ratio of 14 and expected earnings growth of 7% annually over the next three to five years, Philip Morris presents a potentially lucrative opportunity for investors. Despite a PEG ratio of 2, indicating the stock might be somewhat expensive, the maturation of investments in Zyn and debt reduction augur well for future cash generation and sustained growth in earnings and dividends.
In sum, Philip Morris International's pivot towards next-generation products not only signifies a pivotal transition from its traditional tobacco roots but also offers promising long-term returns for investors.
Analyst comment
Positive news. The shift towards next-generation products presents growth opportunities for Philip Morris International. With successful adoption of IQOS and the acquisition of Zyn, the company aims to increase revenue from these products. Despite high dividend payout ratio, the firm’s commitment to dividend remains strong. With a forward P/E ratio of 14 and expected earnings growth, the stock presents a potentially lucrative opportunity for investors.
