Philip Morris Surges 75%, Is Its Smoke-Free Pivot a Game Changer?

Shares of cigarette giant Philip Morris (NYSE:PM) have advanced considerably over the last year. The tobacco stock, long looked at mostly for its high dividend yield, has surged by over 75% in the last 12 months and over 20% in the last 30 days alone.

Why has PM stock rallied so far, and is now the time to consider getting into one of the tobacco industry’s longest-standing titans?

Key Points

• Philip Morris’ pivot to smoke-free products drove 14.2% revenue growth,

• That fast growing division helped to boost the stock 75% in 12 months.

• The 3.3% yield remains attractive, with steady but modest growth ahead.

Philip Morris Business Model Pivot Has Been Key

One of the biggest drivers for PM stock over the past year has been the company’s growth as it refocuses on smoke-free tobacco products. In 2024, the company’s revenues from its smoke-free business increased by 14.2%. This drove total revenue growth to 7.3%, while adjusted diluted EPS rose 14% to $1.55.

Since mid-2023, Philip Morris has maintained revenue growth rates that range from the mid single digits to the low teens, resulting in a significant expansion of the company’s total sales. The company has also been increasing earnings for three consecutive quarters. Both of these trends have helped to breathe new life into the stock, which previously had seen its prices remain largely stagnant from late 2021 through early 2024.

The fact that Philip Morris is successfully growing its smoke-free category is particularly positive because the company is planning for a time in the future when making and selling cigarettes is no longer its core business.

With smoking rates rapidly declining in much of the world over the past few decades, tobacco companies have become increasingly unattractive growth investments. PM, however, could buck this trend by building brand moats in the smoke-free category.

Profitability has been a bright spot for Philip Morris, as the company’s net margin sits at 18.6%. Return on invested capital has been similarly positive at 17.8%. This solid ROIC indicates that Philip Morris is successfully generating good returns from the cash invested into its various businesses.

Philip Morris is also in a decent position to unlock value for shareholders by selling off some parts of its combustible portfolio. Recently, it was reported that the company was considering selling off the cigar business it acquired while buying Swedish Match AB. That acquisition was crucial for Philip Morris, as it gave the company access to the popular Zyn brand of tobacco-free nicotine pouches. Selling off the cigar business could put extra cash in PM’s war chest while further reducing its reliance on the vulnerable combustible products business.

The future could also be fairly bright for Philip Morris. In the coming few years, analysts expect to see EPS rise by almost 10% annually. This reasonably high rate of forward growth is likely contributing to the stock’s increase, as the market is pricing in expansion that typically isn’t expected from a cigarette company.

Is PM’s Dividend Still Attractive?

For many years, investors have looked at tobacco stocks like Philip Morris mostly as generators of dividend income. While the rapid increase in share prices over the last year has certainly reduced PM’s yield, the stock still offers shareholders a very respectable stream of income. PM shares yield 3.3%, more than twice what investors can expect to get from the S&P 500 index.

With earnings expected to rise, it seems unlikely that Philip Morris will see its dividend growth stop anytime in the near future. With that said, investors may not see incredibly high growth rates from PM shares.

The last 10 years have seen management raise the dividend at an annualized rate of only 3.2%. While higher earnings could result in slightly better dividend growth rates going forward, PM is likely still better as an immediate income stock than as a dividend growth investment.

PM’s Valuation and Price Targets

After shooting up at a much higher rate than the broader market over the last year, Philip Morris is trading at a price that may be toward the upper end of its fair value range. The market is pricing PM shares at 35.2 times earnings and 6.5 times sales, both ratios that would typically be associated with companies with rather high long-term growth potential.

The price of the stock has also moved beyond the average analyst price forecast of $148.77. With shares trading at $158.79, PM has a projected 12-month downside of 6.3%. Despite this, PM still has a consensus buy rating supported by 6 of the 10 analysts covering the stock.

Why Is PM Stock Up So Much?

Smoke-free products is the fastest growing division at Philip Morris and has spurred the stock higher by almost 70% over the past year.

As a result of that rally, right now, the largest problem facing Philip Morris from an investor perspective is one of valuation. Though the company is doing well, it may not be enough to justify paying 35x earnings in an industry that is still likely to be pressured by future regulation and anti-tobacco efforts.

Even with smoke-free products growing, management will still have to navigate the gradual decline of its combustibles business. Given that this still accounts for more than half of Philip Morris’ revenues, the price investors are paying today could be on the high side.

Philip Morris could, however, still be attractive to investors for its ability to deliver steady dividends. With a yield of over 3%, PM produces significantly more income than an S&P 500 index fund or even many high-yield ETFs.

Net income is actively growing again, and further strength in the smoke-free business is likely to keep the company’s per-share earnings rising gradually over the coming years. This, in turn, will likely allow management to keep raising the dividend at a modest pace for many years to come.

Tobacco products are historically resistant to economic downturns, and the dividends the stock pays are undoubtedly a cushion against an uptick in inflation.