Analysts estimate that millions of people die prematurely around the globe every year from habitual cigarette usage. This has been an issue for over a century, which is why people and governments are consistently working to reduce smoking levels among the global population. But what if I told you the largest driver of cigarette reduction today is one of the world's largest tobacco companies?
Enter Phillip Morris International (PM 0.61%). That's right, over the last decade-plus the global tobacco giant has invested billions and successfully pivoted its business away from cigarettes to "safer" nicotine products. Even though it has embraced these fast-growing nicotine products, its stock still trades at a cheap earnings multiple and has a strong dividend yielding over 5.5%. Investors are likely still valuing it as a tobacco stock, a sector that is considered to be in secular decline.
Here's why this misunderstood nicotine giant can be a fantastic income grower for your stock portfolio.
Moving beyond cigarettes
The best way to reduce cigarette usage is to introduce safer nicotine alternatives. A prime example of this is Sweden, which has popularized the Snus pouch and tobacco-free nicotine pouches in its country. After decades of growth, these products are now more popular than cigarettes in the region.
Phillip Morris International is trying to implement this same strategy around the globe. It has a safer inhalation brand called Iqos, which is in the category of "heat-not-burn" tobacco products. The brand is popular in Japan and Europe and is now doing $10 billion in annual sales. Recently, it purchased a company that owns Zyn nicotine pouches, which are popular in the United States and Nordic countries. That brand recently passed $2 billion in retail sales in the United States. Over the next few years, it hopes to introduce Iqos to the United States and the Zyn brand to more markets around the globe.
In the fourth quarter of 2023, smoke-free products were 39% of company sales compared to under 1% in 2025. That is some impressive growth. By 2030, management expects two-thirds of company revenue to come from smoke-free products like Iqos or nicotine pouches. This sets the company up for more durable and longer-term growth as it moves away from the dying cigarette industry.
Pricing power galore
Despite volume declines in cigarettes, there is still a lot of juice left to squeeze from Phillip Morris International's legacy operations. It has a strong history of raising prices to counteract volume declines, which keeps earnings growing in local currencies. The company grew prices by 3.7% in 2020, 2.7% in 2021, 5% in 2022, and 8.9% in 2023 for its legacy cigarette brands and still gained market share across the globe.
Even better, given the fact it has the leading smoke-free nicotine brands, that means if a nicotine user quits cigarettes due to price hikes, they will likely switch to another brand that Phillip Morris International owns. This makes the company much safer to invest in compared to other tobacco giants.
One thing that hurts Phillip Morris International -- especially with United States investors -- is the fact it earns a lot of its sales from emerging markets. After splitting from Phillip Morris USA, the company now has a lot of foreign currency risks. Even if sales grow in local currencies due to price hikes, if those currencies devalue versus the U.S. dollar it won't show up as revenue growth for U.S. investors. The U.S. dollar has surged in value compared to many other currencies in recent years, presenting a headwind to Phillip Morris International investors. A headwind like this is unpredictable and may continue over the coming years.
PM Dividend Per Share (TTM) data by YCharts
Can the dividend grow?
Today, Phillip Morris International has a dividend yield of 5.73%, which is close to 4x the S&P 500 average of 1.47%. This indicates some investors are bearish on the company's ability to grow or even just maintain its dividend payouts.
Historical evidence shows this is likely misguided. Phillip Morris International's dividend per share is up 147% since 2009 when it spun out as its own publicly traded company and has consistently grown each year. Today, with more room left to grow prices and the phenomenal growth coming from the smoke-free brands, I think there is plenty of room for this dividend-per-share payout to climb higher over the next 10 to 15 years.
With a high dividend yield that can grow for many years, I think Phillip Morris International is a safe income stock with a lot of growth potential, making it perfect for any investor's portfolio.
