Philip Morris International (PM -1.11%) is a famous dividend stock because of its consistently high yield, currently at 5.6%. The company recently held an investor event where it laid out the plans for its long-term future.
While tobacco use is declining, Philip Morris is balancing its business of the past with opportunities to grow via smokeless products in the coming years. Long-term investors can consider buying the stock based on three crucial takeaways from the event.
Here's what you need to know.
1. The IQOS opportunity is just getting warmed up
Philip Morris has spent the past decade developing and rolling out IQOS, a device that heats tobacco to produce a vapor rather than burning it to produce smoke. IQOS isn't good for you, but Philip Morris has won approval from regulators to market the product as a "reduced-risk product," a lesser evil compared to smoking. Today, roughly 35% of the company's revenue comes from smoke-free products, including $9.5 billion from IQOS last year.
But this game is still in its early innings. Philip Morris hasn't yet entered 35% of the global addressable market (excluding China, which is state-controlled). Even more importantly, expansion opportunities are present in existing markets. IQOS is growing its market share over time to an average of 15% by year eight following its local launch.
Building a $10 billion business in a decade is no easy feat, so IQOS has seemingly proven itself a long-term winner that can carry the company. This could give Philip Morris a leg up on competitors if non-Marlboro smokers switch to IQOS. Reshuffling market share in the nicotine industry will be an important theme over the coming decade.
2. The U.S. market could be a gold mine
Historically, Philip Morris sold exclusively to non-U.S. markets, and its sister company Altria did business in the United States. But that's changing. The companies had a partnership to distribute IQOS in the U.S. but terminated it. Philip Morris will launch IQOS in the U.S. in 2024, making the two companies competitors.
Philip Morris has a long-term goal of 10% market share through IQOS, which could add billions of dollars to revenue from a market that wasn't previously accessible.
Oral nicotine pouches have become a high-growth category too, which Philip Morris recently jumped into by acquiring Swedish Match last year. The company makes Zyn, the brand that leads the U.S. market -- again intensifying competition with Altria.
Image source: Philip Morris International.
Philip Morris is traditionally a very profitable business; it converts about 30% of its revenue to free cash flow. However, the company could see its cash flow grow meaningfully over the coming years due to its U.S. growth. Management estimates that U.S. IQOS and Zyn sales could be as much as six times more profitable than international cigarettes. The influx of profitable revenue from the U.S. is a big potential tailwind.
3. Management plans to reinforce the balance sheet
Philip Morris plans to be very thoughtful with how it spends its profits moving forward, which should be music to the ears of long-term investors. Management forecasts the business will generate between $36 billion and $39 billion in operating cash flow between 2024 and 2026. That average of about $12 billion per year is a significant uptick from what the business has generated in the past, hinting at the potential growth on the way.
Data by YCharts.
This will do two things. First, it will help the company pay its debt. Management wants to bring debt down from the current 3 times earnings before interest, taxes, depreciation, and amortization (EBITDA) to 2 times EBITDA by the end of 2026. Second, the dividend payout ratio is presently high at 98%, meaning the company spends nearly all of its earnings on its quarterly payout. Management is targeting a 75% payout ratio, leaving profits for other purposes.
It may take a few years, but Philip Morris could become a larger, more profitable, and financially stronger company. That transformation should result in better returns for shareholders too -- the future looks bright for this sin stock.
