In 4 Days, Philip Morris Stock Becomes an Even Better Investment

The tobacco industry is obviously still around, but there's no denying it's on the defensive. The smoking cessation movement has been whittling away at the number of worldwide smokers for decades, and there's no real growth in store for the traditional cigarette business.

And yet, tobacco giant Philip Morris International (PM 1.23%) is still a compelling investment prospect that's about to get even better. On Wednesday, May 1, the company will be able to launch a proven product in a proven market, setting the stage for growth few investors thought was still possible for the company.

If you were on the fence about this major dividend stock, you may not want to wait any longer to dive in.

The complicated IQOS journey

What's happening at the start of May? That's when Altria's (MO 0.95%) exclusive rights to sell the tobacco-heating IQOS device within the U.S. will officially expire. From that point on, those rights will belong to Philip Morris International, which is preparing to introduce IQOS to select U.S. markets next month.

Investors keeping tabs on the industry's shift away from combustibles and toward noncombustible alternatives (like vaping) might be a bit confused.

Although the IQOS device was briefly sold in the U.S., rival British American Tobacco convinced the U.S. International Trade Commission in 2021 that the product violated a handful of patents held by its R.J. Reynolds subsidiary.

While Philip Morris has continued to sell IQOS in several other countries, it's not been sold by anyone in the U.S. since then. The upcoming rollout is only possible thanks to two major developments. First, Altria sold its rights as the exclusive U.S. distributor of IQOS devices to Philip Morris in 2022, at a cost of $2.7 billion. However, those rights don't kick in until next week. And second, British American Tobacco and Philip Morris settled their various patent disputes earlier this year, paving the way for U.S. regulators to lift their IQOS ban.

Philip Morris should hit the fertile ground running

And the opportunity for Philip Morris is significant.

Most tobacco companies are expanding their nonsmoking product lineups these days. Altria, for instance, wholly owns pod-based vaping brand NJOY. It's also participating in a joint venture with JT Group to offer a heated-tobacco stick product as a competitor to IQOS. R.J. Reynolds is taking a slightly different tack, prioritizing the reduction of the potential harm tobacco can cause.

Philip Morris International, however, is arguably doing more -- and finding more success -- on the noncombustible front than any other player.

Led by IQOS, smoke-free products accounted for nearly 40% of Philip Morris's first-quarter revenue of $8.8 billion. The category's organic sales improved 25% year over year, making IQOS the heated-tobacco market leader in 11 different markets. Indeed, while shipments of combustible cigarettes continue to wane, Philip Morris is more than offsetting this dwindling business with 21% growth in shipments of heated-tobacco units during the quarter.

Given this proven marketability, the impending reentry of IQOS in the U.S. market is promising. There are about 28 million U.S. smokers, according to the CDC, and roughly as many regular users of e-cigarettes and vaping devices. Stifel analysts suggest the U.S. market's heated-tobacco business could generate as much as $2.2 billion of annual earnings before interest, taxes, depreciation, and amortization (EBITDA) for the company by 2030. For perspective, Philip Morris produced $13.4 billion of EBITDA in the past year.

Keeping Philip Morris stock a compelling buy

That's just one estimate, of course. The tobacco business remains in flux, whether you're talking about combustibles, heated tobacco, or vaping something other than tobacco. None are healthy, and regulators aren't shy about making that reality clear, challenging the industry's top and bottom lines.

Yet it's also becoming clear that heated tobacco is a palatable, sustainable alternative to traditional cigarettes.

It's not a growth business by any stretch of the imagination. And even if Philip Morris can make IQOS a viable product in the U.S., it could take years to see it measurably benefit the bottom line. But heated tobacco is a business that can drive reliable cash flow for Philip Morris. This supports the company's dividend, which is one of the top reasons to own its stock in the first place.

Its current dividend yield stands at 5.3%, which is far better than the broad market average.