TipRanks Smart Dividend Newsletter – Edition #33

Hello and welcome to the 33rd edition of TipRanks’ Smart Dividend – a weekly Newsletter providing you with investment ideas for safe-bet quality stocks that are outstanding dividend payers, compared to their peers.

Today’s dividend stock recommendation is the world’s largest tobacco company, which is well on its way to transforming itself into a part of the future tobacco-free world.


Investment Thesis: Smoke Without Fire

In today’s dynamic market landscape, the tobacco industry is undergoing a significant transformation, driven by shifts in global health awareness and technological advancements. This evolution is characterized by gradually moving away from traditional tobacco products towards innovative smoke-free alternatives. These alternatives, including heat-not-burn devices, e-vapor products, and nicotine pouches, are gaining prominence as they align with changing consumer behaviors and regulatory trends favoring reduced-risk products (RRPs).

The industry’s pivot to these technology-enabled, less harmful products underscores a strategic response to the evolving demands of both consumers and regulators. Leading companies in this sector are heavily invested in research and development, focusing on reducing the health impacts traditionally associated with tobacco while meeting the needs of adult smokers.

This shift offers investors a nuanced perspective. It represents a chance to invest in an industry that is not only rooted in historical resilience but is also actively adapting to new market realities. This investment approach acknowledges the enduring nature of “sin stocks,” often considered resilient in various economic climates. Despite the controversies that surround them, these stocks can offer stability and consistent dividends, making them a viable option for certain investment strategies.

For those considering such investments, it presents an opportunity to engage with a market that is reinventing itself – a market that acknowledges its past while actively shaping its future through technological advancements and a focus on harm reduction.



Quality Dividend Stock: This Week’s Top Pick

Philip Morris International, Inc. (PM), also known as PMI, is the world’s largest tobacco company by market capitalization. It manufactures and sells over 160 brands of smoking products such as cigarettes, tobacco, nicotine-containing products, smoke-free products, and related electronic devices and accessories. PM markets its products in over 180 countries. Philip Morris holds ~26% market share of global nicotine products (excluding the U.S. and China).

The company’s cigarette portfolio is led by Marlboro, the world’s best-selling international cigarette, keeping this title since 1972; its cigarette brands Parliament, L&M, Philip Morris, Chesterfield, and others, are also international bestsellers. PM’s smoke-free portfolio is led by its IQOS “heat-not-burn” product, which is becoming more and more popular around the globe. The company also sells e-vapor products, including VEEV ONE and VEEV NOW, and oral smokeless products, including ZYN nicotine pouches.

The company traces its history to 1847, when a British tobacconist Philip Morris opened a tobacco shop in London. In 1902, the firm’s U.S. branch was incorporated in New York; it was acquired and incorporated as “Philip Morris & Co. Ltd., Inc.” in Virginia. It grew and expanded in the U.S. throughout the years, and in the 1950s it began its international expansion, which started with a subsidiary in Australia and proceeded with the expansion to Europe and Asia. By the early 1980s, the company was the leading cigarette maker in the United States.

In 1987, Philip Morris International (PMI) was incorporated as an operating company of Philip Morris Companies’ businesses. In 2003, Philip Morris Companies Inc. formally changed its name to “Altria Group.” In 2008, Philip Morris International was spun off from Altria (MO), which since then has concentrated on selling its products in the U.S., whereas PMI operates internationally. Philip Morris sells cigarettes under the Marlboro brand and other brands in global markets.

Today, PMI commands a market capitalization of $148 billion, an annual revenue of $32 billion, and a workforce of almost 80,000 employees around the world. It has 39 production facilities worldwide, serving 150 million customers around the globe. The company owns five out of 15 of the world’s top cigarette brands.

In addition, PMI maintains two smoke-free product research facilities in Switzerland and Singapore, which are focused on expanding the company’s iconic IQOS brand offering and adding other non-combustible options.

Since the end of the 20th century, PMI has been working on expanding its business beyond traditional tobacco, recognizing the strong decline in tobacco smoking around the globe. The company underwent a major shift, recreating itself as a global burn-free nicotine product leader.

Now its stated ambition is “to replace cigarettes with science-based smoke-free products as soon as possible.” PMI recognizes that the smoke-free nicotine products, although less harmful than the traditional tobacco-burning smoke, are addictive and not risk-free, and underscores that they are created for adults who would otherwise continue to smoke cigarettes.

PMI has maintained its market supremacy by diversifying its product portfolio, increasing its burn-free nicotine offers through internal effort, rights purchases, and acquisitions.

In 2014, Philip Morris’ IQOS brand took off strongly in Europe and Japan. By 2017, the number of adults who switched from cigarettes to IQOS reached 4.7 million across 38 markets; by 2023, the number rose to 19.7 million across 82 markets. In 2023, the company paid Altria $2.7 billion for the rights to sell IQOS in the U.S. in its first return to the domestic market since the spin-off in 2008. The sales are slated to begin in the first half of this year and are expected to add to the company’s revenues significantly. In addition, in late 2022, PMI acquired Swedish Match company, known for its Zyn nicotine pouches, which are acceleratingly popular in the U.S. thanks to their discretion, variety, and low price.

In 2021, PMI bought OtiTopic, a U.S. respiratory drug development company, and Vectura, a U.K.-based asthma inhaler maker, as a part of the nicotine empire’s long-term plan, dubbed “Beyond Nicotine”, to transform itself into a “healthcare and wellness” company. PMI aims to achieve at least $1 billion in annual net revenues from Beyond Nicotine sources by 2025.

The past decade has been difficult for tobacco companies, as the decline in the number of cigarette smokers has been accelerating globally on the back of growing health awareness and increasingly strict regulations. Their revenues have not declined as much, since they continue to maintain a large and loyal customer base, which allowed them to raise prices to compensate for the lack of growth in cigarette sales. However, the tobacco sales prospects are diminishing, and the traditional cigarette business is definitely an industry in decline.

On this backdrop, Philip Morris is much better positioned than its competitors to capitalize on the global smokers’ shift to burn-free products such as IQOS, e-vapor devices, and oral smokeless products, because it recognized the trend early on, and has already reached significant progress in its transformation from a cigarette seller into a smoke-free lifestyle product company. Since 2008, PMI has invested almost $11 billion into the development of its smoke-free product suite.

In 2022, the total estimated number of global users of PMI’s burn-free products reached 25 million; in that year, the company derived over 32% of its net revenue from these products. PMI aims to generate over half of its revenue from non-combustibles by 2025, and over two-thirds of its total net revenues by 2030.

Meanwhile, combustible tobacco products remain the company’s dependable “cash cow.” While the World Health Organization (WHO) projects a decline in smoking prevalence among adults from 21.1% in 2010 to 15.5% in 2025, the global adult population is growing by around 70 million people per year. The net effect of this declining smoking prevalence and population growth is a forecasted smoker population in 2025 similar to that of 2010. Even if governments achieve their accelerated targets for reduced smoking prevalence, there still will be about 1 billion smokers in 2025.

PMI’s financial health is robust, despite the high debt load it took on to acquire Swedish Match. While its Return on Equity (ROE) is meaningless due to the high debt levels, its Return on Assets (ROA) of 14% and Return on Invested Capital (ROIC) of 19.5% are much higher than the averages for its industry peers, reflecting its high capital efficiency. In addition, the company excels at cash generation, demonstrating an FCF margin of 23%, an industry-beating metric.

Despite the high debt ratio, Philip Morris’ debt is highly rated by major rating agencies: “A2” at Moody’s, “A-“ at S&P Global, and “A” at Fitch Ratings, representing the third-highest notch within the highest level of the ratings scope.

Particularly, Fitch affirmed the company’s rating in November, and while it pointed out the high debt as problematic, it praised PMI’s commitment to return to around 2x leverage in 2026. Additionally, the rating agency said that the high rating is supported by an “industry-leading business profile that reflects its global scale, diversified brand portfolio, and leading position in RRPs (reduced risk products, aka burn-free products), in addition to its substantial geographical reach.” PMI is the highest-rated company in the global tobacco sector.

On October 19, PMI reported its Q3 2023 results, which featured an over 20% growth in adjusted earnings per share, propelling the quarterly EPS to an all-time high. Revenue was in line with analysts’ expectations, rising by 14% year-on-year, and surpassing $9 billion in quarterly net revenues for the first time in PMI’s history. Meanwhile, the adjusted EPS delivered another strong beat, increasing by a double-digit number for a second consecutive quarter. In fact, the company’s quarterly EPS results exceeded analysts’ estimates in all previous quarters when these estimates were available, with the sole exception of Q3 2022.

In the last quarter, the net revenue increase was led by both volume and price increases in all business venues, including combustible tobacco products. The fastest growth was registered in ZYN products, with U.S. sales volumes of 66% year-on-year. The second-best performing product line was heated tobacco products (HTUs), including IQOS, with an increase of 18% in shipment volumes. The company increased its global market share of HTUs to 9%, a significant achievement given the stiff competition in this market niche.

In the period, the gross profit margin rose to 65.5%, while the adjusted operating income margin stood at 39.2%, and the net profit margin was 22.5%, underscoring the company’s stellar profitability.

In the first nine months of 2023, PMI’s total cigarette and HTU shipment volume increased by 1.5%, reflecting an 18.3% increase in HTU shipments across all regions, partly offset by a 1.3% decline in cigarette shipments. Meanwhile, total oral product shipment volume increased by over 100%, which was driven by the Swedish Match acquisition. Total net revenues increased by 11% year-on-year, and adjusted operating income rose by 3.6%.

Following these outstanding results, Philip Morris’ management raised its full-year 2023 outlook, penciling in an adjusted EPS annual growth of 10-10.5% versus its previous forecast of a projected increase of 8.0% to 9.5%. The company also confirmed its forecast of net revenue growth of around 8.0% on an organic basis, at the midpoint of the previously provided range.

In addition, in September 2023 the company increased its regular quarterly dividend by 2.4%, its 16th consecutive annual dividend raise. PMI has increased its annual dividend every year since becoming a public company in 2008, representing a total increase of 183%, or a CAGR of 7.2%.

PMI’s dividend yield currently stands at 5.4%, more than twice the average for the Consumer Staples sector to which it belongs, and higher than average for its industry peers. The company’s payout ratio is a medium-high 85%. The management intends to bring that percentage down to 75% over time, while increasing the payouts through raising earnings.

Despite the company’s robust delivery and high shareholder compensation, PMI’s stock has languished in the past year, albeit outperforming its main competitors Altria and British American Tobacco (BTI). The main factor behind the stock’s 1.6% decline in the past 12 months was a hit to investors’ sentiment towards the tobacco industry, stemming from the troubles faced by BTI. The British-American company wrote off $31.5 billion from its U.S. cigarette brands in 2023. In addition, the U.K. government is raising pressure on tobacco sellers with its plans to weed out smoking by increasing the legal age every year. This is less of a concern for the much more geographically diversified PMI. PMI is also actively seeking to reduce tobacco’s share of its total revenue, though the negative sentiment still weighs on the stock. However, in the past three years, Philip Morris’ shares rose by 15%, versus negative performance results at its competitors during the same period.

Meanwhile, the company is trading under very attractive valuations, with its TTM P/E of 18.5 and Forward P/E of 19 representing 12% and 3% discounts, respectively, to the Consumer Staples sector averages. It is valued higher, of course, than its two main competitors, due to is superior past performance and growth prospects.

TipRanks-scored top Wall Street analysts see an average upside of 19.4% for the stock in the next 12 months. BTI carries a TipRanks Smart Score rating of 9/10 (“Outperform”) with a “Strong Buy” recommendation:

In conclusion, we view Philip Morris International as an exceptional company combining strong financial performance, high adaptivity to changes leading to industry-leading growth prospects, and strong alignment with shareholder interests. As such, we believe that PMI is a compelling long-term income opportunity for dividend investors.



The information contained in this article represents the views and opinions of the writer only, and not the views or opinions of TipRanks or its affiliates and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy, or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment, and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices, or performance.