3 Reasons Philip Morris International, Inc. Stock Could Fall

The global tobacco giant faces challenges. Find out about them.

Dan Caplinger
Dan Caplinger
Jun 30, 2017 at 9:08AM
Consumer Goods

Philip Morris International (NYSE:PM) stock has climbed to all-time highs, benefiting from a favorable financial market environment despite facing some execution issues of its own. The success of recent measures aimed at long-term growth has been encouraging for investors, and many believe that the company is building competitive advantages in key areas that could bode well for its long-term future. But Philip Morris still faces plenty of challenges that it will have to overcome in order to avoid a future downturn in its stock price. In particular, the following three issues could put pressure on Philip Morris stock in the future.

1. Competitive pressure is building

Philip Morris International has done its best to build a strong growth strategy forward. The company's core tobacco business still makes up the bulk of its revenue, but alternative products are making up an increasingly important part of Philip Morris' long-term growth expectations. Strong performance from the iQOS heated-tobacco product in Japan has given the company an important first-mover advantage, and Philip Morris is aiming to make the most of it by dramatically ramping up supply of the special tobacco needed for the iQOS system.

But British American Tobacco (NYSE:BTI) has moved aggressively in response with a heated-tobacco system of its own, called glo. Over the next couple of years, British American and Philip Morris are likely to butt heads in a number of markets, including not only Japan but key European countries as well. British American thinks that it can see similarly strong gains in market share as what Philip Morris has already seen in the Japanese market. If that proves to be the case, then the gains that Philip Morris has seen from iQOS could prove to be less permanent than investors currently hope.

Cigarette assembly line.

Image source: Philip Morris International.

2. Regulatory risk is higher than ever

Philip Morris has always been subject to regulation, but the company has upped the stakes in order to try to further its business model and alternative-products strategy. Late last year, the company filed a modified risk tobacco product application with the U.S. Food and Drug Administration, and Philip Morris hopes that the FDA will eventually grant approval for the iQOS system to be sold in the U.S. market. Philip Morris already has a partnership in place with U.S. counterpart Altria (NYSE:MO) to sell iQOS in the U.S. if it's approved.

However, there's no guarantee that the FDA will end up doing what Philip Morris wants. Pressure from consumer groups and other interested parties could lead either to an adverse decision or to long delays in the FDA's consideration of the application, which in turn could derail Philip Morris' hopes of getting iQOS quickly into the U.S. market. Moreover, Philip Morris wants to use FDA approval as a linchpin for getting approval from other countries' regulatory overseers as well. An adverse FDA decision could actually hinder iQOS adoption elsewhere, and that in turn would be a major challenge to a growth strategy that depends on the long-term success of Philip Morris' reduced-risk product portfolio going forward.

3. Dividends might not bounce back as quickly as hoped

Over the past few years, Philip Morris has struggled to overcome tough foreign exchange market conditions. Currency impacts largely wiped out profit growth, and that resulted in Philip Morris having to reduce the pace of its dividend growth to just token quarterly payout increases of 2% in 2015 and 2016.

Lately, currency issues have stopped being quite as difficult. The U.S. dollar has actually lost ground so far this year across several major foreign currencies, and investors are hopeful that this will boost earnings and allow Philip Morris to make a more substantial dividend increase later this year. Philip Morris, however, still has to produce the earnings growth necessary to justify a higher dividend payout, and plunging sales volumes for traditional cigarettes could outweigh any growth from a weaker dollar and reduced-risk sales gains. If that happens, then Philip Morris could decide to make just another disappointingly small dividend increase -- or no boost at all. That would likely hit the stock hard.

Philip Morris International stock has shown strong gains, so a pullback wouldn't be a surprise. For investors who see the potential for future growth, it would be disappointing to see these three things call into question Philip Morris International's strategic vision for the future.