It’s well-established that tobacco stocks are defensive, but Philip Morris (NYSE:PM) stock also offers a compelling mix of a significant dividend yield with upside potential from some interesting catalysts, such as the success of its smokeless tobacco products and its stake in Swedish Match (OTC:SWMAY). Therefore, I am bullish on PM stock.
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A Defensive Business with Upside Potential
Many investors like tobacco stocks like Philip Morris because they have resilient businesses. Their customers buy cigarettes on a habitual, routine basis and are unlikely to change their habits based on economic conditions. Smokers are unlikely to “trade down” from their favorite brands. These tendencies make this a relatively steady and recession-resistant business.
The tobacco giant also has great geographic diversification — the company sells its products in over 180 different markets worldwide and is best known for selling the Marlboro brand outside of the United States.
Further, Philip Morris has a bit more upside than the typical tobacco stock given several potential growth drivers it has up its sleeve — its success with heated tobacco products and its ongoing pursuit of a Swedish Match acquisition.
Heated Tobacco is Heating Up
Philip Morris is a leader in heated tobacco products, such as its IQOS line of heated tobacco products. These products heat tobacco without burning it, which the company says reduces the emission of harmful chemicals by 95%.
During its most recent quarter, Philip Morris reported shipment volume growth of 22% for these heated tobacco units. Between the first quarter of 2021 and the third quarter of 2022, the total number of IQOS users has steadily climbed from 15 million to 19.5 million.
These products have been a hit around the world, and Philip Morris is scheduled to gain full control of commercializing the product in the United States, the largest and most valuable smoke-free market in the world, in April of next year.
Philip Morris’ Swedish Match Ambitions
In addition to the growth of IQOS, Philip Morris has another trick up its sleeve — it is pursuing the acquisition of Swedish Match. Swedish Match is best known for its Zyn nicotine pouches. These Zyn pouches have quickly grown in popularity in the United States, and if Philip Morris is successful with the acquisition, this would add another major growth driver to its arsenal.
Over two-thirds of Swedish Match’s revenue comes from smoke-free products. Furthermore, almost two-thirds of its revenue comes from the United States. The acquisition would align with Philip Morris’ goal of becoming the smoke-free champion, further strengthening its claim to this title.
Philip Morris views nicotine pouches as a $1 billion market in the U.S. (and a $2 billion market globally), and this fast-growing category grew by 80% in the U.S. in 2021 (and 65% globally). Zyn has a leading market position in the category both in the U.S. and globally, with a 64% market share in the U.S. and 40% of the global market share.
However, it should be acknowledged that there is the risk that the acquisition will not be completed, but Philip Morris looks like a solid enough investment on its own accord even if the acquisition doesn’t go through.
A Reasonable Valuation and Juicy Dividend
Philip Morris trades at about 17 times earnings, which is near the broader market’s P/E ratio. So while its valuation isn’t necessarily cheap, it’s not expensive either, and the stock looks more appealing when you take its large dividend into account.
Shares of Philip Morris yield just under 5%, which is far better than the average yield of 1.6% that the S&P 500 (SPX) currently sports. It’s also superior to the yield of 3.675% that 10-Year Treasury bonds offer.
Additionally, Philip Morris has increased its annual dividend payout every year since becoming a public company (when it spun off from Altria (NYSE:MO)) in 2008. Over the course of these 14 consecutive annual dividend increases, Philip Morris has grown the dividend at a solid compound annual growth rate (CAGR) of 7.5%.
Is PM Stock a Buy, According to Analysts?
Turning to Wall Street, PM stock comes in as a Moderate Buy. Of the 11 analysts covering the stock, seven rate it a Buy, three have a Hold rating on it, and one analyst says that it’s a Sell. The average analyst price target of $110.27 represents upside potential of about 7.9% versus the stock’s current price.
The Takeaway
Philip Morris gives you all the benefits of a defensive consumer staples stock, like a resilient business model and an attractive dividend yield. But it adds to this appeal with further upside from the growth of its heated tobacco products and the potential to add Zyn products into its portfolio if it successfully completes its Swedish Match acquisition.
The prospect of further growth in the U.S., thanks to Zyn and IQOS, combined with this above-average dividend yield, makes Philip Morris a compelling investment opportunity for any market environment.
