Worldwide, cigarette smoking is in decline, but dwindling interest in cigarettes may not spell doom for Philip Morris International (PM) stock. The tobacco powerhouse, maker of global brands like Marlboro, has read the writing on the wall.
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Choosing to adapt rather than go extinct, Philip Morris is betting big on its alternative to traditional cigarettes, the IQOS tobacco-heating product. After striking success in Europe and Asia, it plans to bring the product to the U.S. market. To do so, it has formed a licensing deal with its former parent company, Altria Group (MO), which owns Philip Morris USA.
Continued success with IQOS may boost confidence in the company’s long-term prospects and shift PM’s stock, which has mainly traded sideways since 2019.
Even if this new product brings minimal growth, and only helps the company maintain its current level of sales, it still might enhance its valuation. Given that it offers a relatively high dividend yield (4.86%) as well, investors may still find opportunity here.
The stock trades for around $98 per share.
PM Stock and IQOS
IQOS isn’t like the e-cigarette/vaping products we’ve seen until now. Unlike those products, which deliver straight nicotine, Philip Morris’ IQOS device still uses tobacco.
IQOS heats tobacco instead of burning it, a method the company believes is less harmful than cigarettes. Harm reduction is a pragmatic option for the nicotine-dependent, so governments around the world may look the other way instead of intervening in this product’s sale. In fact, in December 2020, the U.S. FDA authorized the IQOS 3 for sale in the U.S.
While this innovation may help stabilize Philip Morris’ sales, it may be a bit of a reach for the company to become a growing business once again. Yet PM stock tends to be resilient. Simply proving to investors that the business is not on the way to extinction might fuel multiple expansion.
Solid Yield in a Low-Interest World
If income, not appreciation, is your investment objective, PM stock may be a great option. With interest rates set to remain at historic lows over the next year or two, it will be tough to find yield.
This stock is one of the few names that could help generate portfolio income, although it’s unlikely to become smoking hot. With the company paying out the lion’s share of its earnings as dividends, the odds of a big boost to this payout may be slim.
On the other hand, with the company growing its dividend an average of 3.5% per year over the past five years, this yield may continue to keep up with inflation. In short, conservative investors who have more interest in income than gains could find this an appealing opportunity. (See Philip Morris International stock analysis on TipRanks)
What Analysts are Saying About PM Stock
According to TipRanks’ analyst rating consensus, PM stock comes in as a Strong Buy. Out of 8 analyst ratings, all 8 rate it a Buy.
As for price targets, the average analyst price target is $109.71 per share, implying around 11.9% upside from current prices. Analyst price targets range from a low of $105 per share to a high of $114 per share.
Bottom Line: Philip Morris International Stock is Less Risky Than It Seems
In the past few years, declining cigarette smoking rates in international markets have negatively affected the performance of Philip Morris International shares. In addition, the ESG (environmental, social, and governance) investing trends, which discourage investment in tobacco stocks, have harmed the stock.
However, thanks to its adaption to tobacco’s new normal with its IQOS harm-reduction product, Philip Morris may not see a massive decline in sales and earnings in the coming decades. Do not expect this stock to see earth-shattering price appreciation, but if you are looking for high-yield dividend plays, consider PM stock.
With its ability to continue its current payout and increase it in tandem with inflation, this is a high yield stock with less risk than it appears to have at first glance.
Disclosure: Thomas Niel held a long position in MO stock at the time of publication.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities
