Among well-known blue chip stocks, Philip Morris International (NYSE:PM) has a relatively short history as a public company, hearkening back to its spinoff from former parent Altria (NYSE:MO) in early 2008. But as a subsidiary of the entity that bore the Philip Morris name before changing its name to Altria a decade ago, Philip Morris International was first incorporated in 1987 and has an even longer history as the Philip Morris Overseas division of its larger parent .

Over that time, the tobacco industry has gone through a huge transformation, and with prevailing attitudes in the U.S. growing increasingly hostile toward smoking, Philip Morris International is now considerably larger than its U.S. counterpart by nearly every measure -- and arguably has greater potential to draw new customers from across the globe. That's the thesis of my premium report on Philip Morris International, which includes the following description of the massive opportunity that the company has in overseas markets.

The opportunity
The tobacco industry has traditionally spurred a huge debate among investors. On one hand, tobacco stocks are cash cows, generating huge amounts of cash flow and paying most of it out as dividends. Yet opponents of tobacco stocks portray those profits as ill-gotten gains from an addictive product, and extensive disputes between tobacco users and sellers over the health impacts of cigarettes have led to seemingly endless litigation and the threat of regulation.

In the U.S., tobacco companies Altria, Reynolds American (NYSE:RAI), and Vector Group (NYSE:VGR) have all seen substantial returns since the late 1990s and early 2000s, when the threat of massive jury verdicts was at its peak and investors greatly discounted the dividend income the companies generated. Since then, an increasing hunger for dividends combined with a less dangerous environment for litigation gradually led investors to a higher comfort level with the stocks, and their prices began to reflect more of their value as income generators.

Nevertheless, the U.S. regulatory environment remains hostile. With the Food and Drug Administration having the authority to regulate tobacco marketing and manufacturing to an extent, it has tried to force companies to reveal information about chemicals in cigarettes with known carcinogenic and other unhealthy impacts. Meanwhile, the Centers for Disease Control and Prevention have launched a massive advertising campaign against smoking. Add to that the numerous rules at the federal, state, and local level limiting or banning smoking in certain areas, as well as huge tax increases over the years, and you can understand the pressure that the U.S. tobacco industry is under.

By contrast, the opportunity that Philip Morris International provides investors is to escape the U.S. regulatory scheme entirely. With its sole focus on international markets, Philip Morris brings the well-known Marlboro brand to emerging markets with growing consumer middle-class populations as well as established nations where smoking doesn't have the same stigma it has in the United States.

Although it's not entirely free of legal or regulatory risk in foreign countries, the reduced threat of gigantic legal recoveries was one of the major reasons why Altria decided to do the spinoff in the first place. Combined with the greater potential for overseas growth, the risk-reward proposition for Philip Morris looks much more attractive than for its U.S. industry peers.


This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.