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Philip Morris (NYSE:PM) is one of the largest tobacco companies in the world, with a market capitalization of almost $200 billion. The company has a dividend of more than 4% and an incredibly strong portfolio of assets. As we’ll see throughout this article, Philip Morris has an impressive portfolio of assets that will support future shareholder returns.
We last discussed the company just over a year ago. Since then, the company has almost doubled the performance of the S&P 500, supported by its continued strong cash flow and dividends to shareholders.
Philip Morris Quarterly Performance
The company’s segments have seen fairly strong performance across the board.
Philip Morris Investor Presentation
The company grew its shipment volume by roughly 3%, which is quite impressive in a tough market where volumes tend to go down due to secular trends. The company’s net revenues increased roughly 10% and operating income managed to increase even further. On a currency neutral perspective, the company’s adjusted diluted EPS performed incredibly well.
The company trades at a P/E of less than 20, and it has a dividend yield of more than 4% that it can comfortably afford. The company’s performance translates well to its bottom line.
Philip Morris Smoke-Free Growth
The company has seen especially strong growth of its smoke-free profile, which combines the addictive properties of nicotine with much lower risk.
Philip Morris Investor Presentation
The company saw more than 300 billion cigarettes sold in H1’24. The growth there was incredibly weak, with 0.1% growth. However, the company saw strong growth with HTUs and Oral SFP (smoke-free products) at 11.4% and 28.9% respectively. That resulted in total values (adjusted) growing by 2.4% despite flat performance with cigarettes.
IQOS in Japan, for example, has an almost 30% market share with more than 10 billion units. Market share is even stronger in Tokyo, for example, with more than 35% market share. The company’s Zyn business also remains incredibly strong, with an almost 70% volume share and more than 75% retail value share. This is a product that’s growing rapidly.
Philip Morris Investor Presentation
This shows how the company’s smoke-free products have continued to grow. IQOS forms the core of the company’s portfolio, but the company now has a new and growing E-Vapor and Oral SFP business. The company’s business and pricing here should both continue growing, which could help offset any weakness in the company’s combustible business.
Overall, the company’s businesses should continue performing well.
Philip Morris Financial Improvements
Putting all of this together, the company’s financials are continuing to improve and have the ability to keep improving.
Philip Morris Investor Presentation
The core for the company was 3.2% in organic shipment volume growth. The company was also able to exercise its strong pricing power despite volume growth and saw 6.0% pricing growth. On top of all of this, the company saw 2.5% smoke-free mix impact, as the company’s smoke-free business tends to achieve higher margins.
The company saw a 1.6% negative impact from a variety of geographical impacts. At the end of the day, the company still saw 10.2% in net revenue growth and 7% in adjusted net revenue growth. That’s strong financial improvements for the company’s business, YoY.
Philip Morris Investor Presentation
It’s key that not only could the company increase its revenues, but it could keep its margins flat as it raised prices, partially impacted by currency and acquisitions. That enabled the company’s profits to remain strong.
Shareholder Returns
Putting all of this together, Philip Morris has the ability to drive substantial shareholder returns.
Philip Morris Investor Presentation
The company has expanded its outlook with the bottom-line being roughly 2% growth across the adjusted diluted EPS. This is supported through both shipment volumes and revenue remaining strong. The company is expecting an adjusted diluted EPS of roughly $6.4 / share, despite unfavorable currency impacts of $0.34 / share.
That’s a pretty substantial impact of currency. That EPS puts the company at a P/E of ~19 with continued EPS growth. The company has sufficient cash flow to pay its dividend yield of more than 4%, and it’s a valuable long-term investment. The monopoly nature of the tobacco market where companies are dominant in their segments makes comparisons difficult.
However, Philip Morris has a strong international presence, a market that is declining slower and seeing incomes increase more than the U.S. market (where Altria dominates). Our view of the P/E is versus the S&P 500 which has a P/E of almost 29 and forecast 11% earnings growth for 2024. Philip Morris is matching that earnings growth with a much lower valuation.
Our View
Philip Morris has been performing well recently. Our view is that the company’s share price performance recently has been supported by the view that interest rates will decline, which has pushed the company’s dividend down. The company’s dividend is its primary form of shareholder returns. Despite that, we don’t see the company as overvalued.
The company trades at below the valuation of the S&P 500 with strong FCF and continued earnings growth. The company has stopped buying back shares, but it’s maintained hefty shareholder returns. Given the reduced risk of smokeless products supporting volumes, we see the company as a valuable long-term investment.
Thesis Risk
The largest risk to our thesis is the long-term decline of the tobacco markets, given that even smokeless products have risk. Governments tax it highly to avoid users from using it, and more educated users also move away from it. That combination can stop Philip Morris from being to generate long-term shareholder returns.
Conclusion
Philip Morris has an impressive portfolio of assets. The company is working hard to continue its growth even in a difficult market. The company has a market capitalization of almost $200 billion, and a dividend yield of more than 4% that it can comfortably afford. At the same time, the company is focused on continuing its growth.
Going forward, we expect Philip Morris to continue growing its earnings and driving strong shareholder returns, making it a valuable investment. Let us know your thoughts in the comments below!
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