Is Philip Morris Stock Overvalued?

If there is one industry that can be termed truly recession-proof, it has to be tobacco. As unfortunate as that sounds, the sector caters to a human compulsion that’s in constant demand no matter what the booms and busts of markets or economies. 

Tobacco giant Philip Morris International Inc. (NYSE:PM) is seeing gains by virtue of its recession-proof business at this moment. Over the past year, the company’s stock has gained close to 30%. But is it cheap to buy now after the run-up?

Philip Morris Migrating to Nicotine

Philip Morris is a well-established tobacco giant, but young Americans are getting less and less into smoking. According to one poll, only 6% of people under the age of 30 smoked cigarettes. So, younger Americans have recognized the adverse health impacts of tobacco and migrated to alternatives. This cohort is more likely to smoke e-cigarettes or vape.

In line with the market’s trends, Philip Morris has also aimed for a smoke-free future. Since 2008, the company has invested over $12.5 billion to develop and commercialize smoke-free products for adults. Management argues that without this initiative, adults would continue to smoke, and this can eliminate cigarette smoking once and for all.

Aligning with this effort, Philip Morris acquired oral nicotine company Swedish Match in 2022, giving it access to the smoke-free IQOS and ZYN brands. The U.S. Food and Drug Administration has already given authorizations to versions of some of the IQOS products and Swedish Match’s General Snus products under something called Modified Risk Tobacco Products.

Midway through last year, Philip Morris announced that it would open a $600 million facility in Colorado to create ZYN nicotine pouches. The company sees a $550 million a year economic impact of this initiative.

On the other hand, the World Health Organization doesn’t seem to believe tobacco firms are doing enough and launched the “Stop the lies” campaign aiming to stop the youth population from falling for the tricks of the tobacco industry, which supposedly downplay the risks of nicotine products. Although smoke-free products like tobacco pouches are not as harmful as smokeable tobacco, they are still not completely risk-free.

Yet, it seems that their relatively lesser risk has been enough for the FDA, which recently gave approval for Philip Morris’ ZYN brands’ 10 nicotine pouches. The FDA evaluated that these products had “substantially lower” amounts of harmful ingredients than cigarettes.

Philip Morris’ Stable Dividend Is High and Growing

Since Philip Morris became a public company in 2008, the Board of Director has authorized dividend increases in each and every year, resulting in a 16 consecutive year streak of of dividend growth.

The rates of increase have been nothing short of startling too given that, since 2008, Philip Morris’ dividend increased by 193.5% and has a compound annual growth rate of 7%.

The company last declared a quarterly dividend of $1.35 per share. This cumulates to an annual dividend of $5.40 per share, yielding 4.36% at present levels.

Philip Morris has a relatively high payout ratio of 82.53%. While this might seem unsustainable, the company’s constant dividend growth speaks otherwise.

How Is Philip Morris Performing at the Moment?

Philip Morris has last reported its third quarterly results which were capstoned by $9.91 billion in net sales, an uptick of 8% from the prior year’s period. The company’s stock popped after the report, and with good reason.

Philip Morris’ stock was not seeing much action before it pivoted towards smoke-free products but these new additions are gaining a lot of traction.

The company’s smoke-free business segment reached close to 40 billion units in quarterly shipments and made up 38% of its top line, up by 1.9% year-over-year as well as contributing 40% to its gross profit (up by 2.2 percentage points from the year-ago value).

In Q3, its smoke-free portfolio registered a 14% year-over-year jump in sales to reach $3.78 billion. This was more than double the growth that the combustible segment recorded, which registered a 5% year-over-year growth (despite having a higher contribution weighting to the the top line).

The company is highly profitable with net earnings of $3.22 billion, a 48% jump from the prior year’s period.

Is Philip Morris Stock Overvalued?

Philip Morris still has upside to $135.86 per share according to the 14 analysts who cover the stock. With limited upside in the eyes of Wall Street and a fair value calculation using discounted cash flows pegging $122 per share as the ceiling for the stock, arguably the risk now is steeper than the reward for new buyers.

Those already sitting on gains may wish to ride the wave to see how much higher the share price can go and avoid triggering tax gains but for those on the sidelines, it may be best to scout elsewhere for higher expected outcomes.

Few companies on Wall Street offer growth and stability at the same time, but Philip Morris sits squarely in that zone. 

The company’s smoke-free portfolio has really caught on and is likely to propel the stock even higher. And that’s after 2024, which was one of the company’s best years as a public company. 

#1 Stock For The Next 7 Days

When Financhill publishes its #1 stock, listen up. After all, the #1 stock is the cream of the crop, even when markets crash.

Financhill just revealed its top stock for investors right now... so there's no better time to claim your slice of the pie.

See The #1 Stock Now >>

The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.