Billionaire Bets on Fast Growth Unit In Boring Stock

If you only look at consumer trends within the United States, it might seem odd that Philip Morris’s stock has done so well. Aren’t people giving up cigarettes?

For the most part, they are, but the company has planned for the effects of smoking cessation programs. The share price speaks to Philip Morris’s success. Over the last year, share prices have risen from about $88 to over $125.

Plus, you have to wonder why Stanley Druckenmiller, a billionaire investor, has bet so big on Philip Morris that it now makes up 3% of his investment portfolio.

None of this is as surprising once you take a closer look at Philip Morris’s actions and financials. Should you follow Druckenmiller’s lead and buy Philip Morris shares?

Key Points

• Alternatives like IQOS and Zyn drove a 22.2% increase in shipment volumes, signaling Philip Morris’s successful pivot as smoking rates decline.
• Price hikes of 8.9% in 2023 and 8.8% in 2024 ensure revenue stability.
• With 14%-15% EPS growth forecasted and a $5.40 annual dividend, Philip Morris’s financial strength explains Stanley Druckenmiller’s significant stake.

Philip Morris Leads the Way in Non-Cigarette Nicotine Products

Yes, it might seem odd to bet on a tobacco company during an era when smoking rates are falling around the world. The World Health Organization says one in three people smoked in 2000. Today, only about one in five people smokes tobacco products, a near 40% decrease.

Philip Morris has already found ways to generate revenue by developing cigarette alternatives. The company currently markets its IQOS smokeless devices and Zyn nicotine pouches as healthier alternatives to smoking cigarettes. Health experts warn that these products present plenty of dangers — including nicotine addiction — but plenty of consumers see these options as less harmful ways to satisfy cravings without lighting up.

IQOS and Zyn have already helped Philip Morris maintain financial success as smoking rates fall. They’re especially popular in Europe and Asia. And while the number of units sold doesn’t come anywhere close to the 464 billion units of cigarettes it sold during the first nine months of 2024, there’s a good chance that these products will grow in popularity even as cigarette popularity shrinks.

Philip Morris Stills Makes Plenty of Money From Cigarettes

Eventually, Philip Morris and other tobacco companies will probably see cigarette sales fall globally. Over the last few years, though, Philip Morris’s cigarette sales have grown by about 0.5% per year. That’s definitely a bad sign for any business that relies solely on cigarettes to generate revenues. It’s pretty good news, though, for a company that needs time to market its smokeless products to more consumers.

Plus, 0.5% annual growth is noticeably higher than what other cigarette companies see. At such low rates, every sale helps.

It also helps that Philip Morris has raised its cigarette prices to continue bringing in more revenue while it pivots. Philip Morris has raised its prices at least three times in as many years. In 2022, it raised cigarette prices by 5%, on average. The next year, it raised prices by 8.9%. Last year, it increased cigarette prices by 8.8%.

These adjustments have kept Philip Morris financially successful, even as many of its competitors struggle to keep up with changes in how consumers behave.

Philip Morris Has Strong Financials and Dividends

The most recent earnings report from Philip Morris shows that the company has strong financials that could make it a good long-term investment. After favorable third-quarter performance, Philip Morris raised its full-year growth outlook for adjusted diluted EPS to 14% to 15% (excluding currency).

The Q3 2024 results also reveal impressive performance compared to Q3 2023. We see that the total shipment volume grew by 2.9% to 203 billion units. Oral smoke-free products drove much of that growth. While Philip Morris only shipped 4.4 billion units of SFPs, that number is 22.2% higher than last year.

Philip Morris International also experienced strong growth in net revenues and gross profit. The $6.5 billion in gross profit is 8.4% higher than Q3 2023. Again, SFPs pushed this growth. While profits from combustibles grew 5.7%, the gross profit from PMI’s smoke-free business increased by 15.9%.

Cigarettes still earn Philip Morris more money than smoke-free products, but the growth percentages suggest that this will change in the future. Even assuming that combustible sales growth remains flat, instead of decreasing, SFPs will soon overtake that segment.

PMI’s dividends will also attract some investors. Dividend payouts have grown steadily for at least two decades. Currently, investors earn $1.35 per share per quarter, or $5.40 per share over a year. Admittedly, it’s not the most impressive stock available, but it looks like a relatively safe bet in an industry that many people assume is dying instead of thriving.

Why Did Stanley Druckenmiller Buy Philip Morris?

Rapid growth of 22.2% in the smoke-free products division combined with strong pricing power in the core division has likely contributed to Stanley Druckenmiller taking such a large stake in Philip Morris.

We see mixed reviews from analysts recommending whether investors should Buy, Hold, or Sell shares in Philip Morris. Research shows six Buy ratings, three Hold ratings, and one Sell rating. The consensus is to buy, but dissenting opinions should encourage you to take a closer look at the numbers before you make a decision.

Over the last 52 weeks, Philip Morris’s stock price has been as low as $87.82 and as high as $134.15. For the few who happened to buy at the lowest point and sell at the highest, that translates to a 52.76% return, absent the dividend payout.

That’s exceptional, but we can’t roll back the clock and buy stocks we know will succeed. We do, however, have some estimates that show investors can still profit from investing in Philip Morris today. Optimistic estimates say that the stock will reach $135.86, nearly 10% above its current price. The less pessimistic view says that Philip Morris shares will dip to $102 per share, which means today’s buyers would lose about 16.8% of their investment money.

The bottom line is the triumvirate of a high dividend yield, exceptional pricing power and fast growth in smokeless products is combining to make an exceptional investment case for PM now and explains why one of the most successful investors of all time has taken such a large position.