With the S&P 500 down 14% year to date, 2022 hasn't been kind to many stock market investors. But international tobacco giant, Philip Morris International (PM -1.73%), has weathered the storm better than most, with its stock up 2% over the period.
Let's discuss why the company can continue outperforming over the long term.
The tobacco industry is recession-resistant
According to a Bloomberg report, the U.S. has a 38% chance of entering a recession within 12 months, which could negatively impact many businesses. As a tobacco company, Philip Morris is highly shielded from these challenges because nicotine products are habit-forming, and consumers will likely continue buying them in a weak economy.
But while the industry's recession-proof nature has made it a darling for investors who prioritize safety and stability, it isn't without risk.
The Biden administration is mulling a plan to force cigarette makers to reduce nicotine content in their products to "minimally addictive" levels. And in June, the FDA banned Juul vaping products (although the decision is currently on hold pending additional review). While these headwinds have hurt U.S.-focused tobacco companies like Altria Group (down 7% this year), Philip Morris targets international markets outside the U.S., so it has little to fear from American regulation.
Philip Morris's reduced-risk pivot is picking up steam
Philip Morris is also positioning its brand as a more health-conscious alternative to rivals by transitioning to reduced-risk nicotine products and healthcare. The company's flagship reduced-risk product is IQOS, a heated tobacco unit that heats tobacco without burning it to reduce less harmful chemicals, according to company research. Philip Morris has begun a successful global rollout of the product.
As of the second quarter, smoke-free products (which include heated tobacco units, vaporizers, and oral tobacco) represent roughly 30% of revenue ($4.3 billion). And with plans for the majority of revenue to be smoke-free by 2025, Philip Morris has embarked on a series of large healthcare acquisitions.
In September 2021, the company completed its acquisitions of inhalant medication maker Vectura and Fertin Pharma, which specializes in medicinal chewing gum. Both deals could help Philip Morris develop more reduced-risk nicotine products while also giving it additional growth drivers in the pharmaceutical industry.
The massive dividend is icing on the cake
With a forward price-to-earnings (P/E) multiple of 17, Philip Morris International is significantly cheaper than the S&P 500's average of 22. That said, the company trades at a premium to its U.S. counterpart, Altria Group, which has a forward P/E of just 9. The difference can be explained by Philip Morris's reduced exposure to regulatory challenges in the U.S. and impressive transition to reduced-risk tobacco products and healthcare.
The stock's dividend yield of 5.2% is icing on the cake for investors. And Philip Morris is serious about returning value to investors. In 2021, the company announced a share repurchase program designed to retire $5 billion to $7 billion in its common stock over the subsequent three years.