3 Reasons Philip Morris Could Be a Defensive Income Stock

Philip Morris International (PM) - Motley Fool Scoreboard Analysis

Key Concepts:

• Philip Morris International (PM): A leading global tobacco company, primarily focused on combustible and smokeless products.
• Smokeless Products: Alternatives to traditional cigarettes, including nicotine pouches (e.g., Zyn) and heated tobacco products.
• Dividend Coverage: The ratio of a company’s dividends paid to its earnings or cash flow, indicating the sustainability of the dividend.
• CAGR (Compound Annual Growth Rate): The average annual growth rate of an investment over a specified period.
• Scoreboard Rating: A 1-10 rating system used by Motley Fool analysts to assess a stock’s potential. (10 = Invincible, 1 = Hopeless)

I. Business Strength & Industry/Competition

The discussion centers on the durability of Philip Morris International’s (PM) business despite the long-term decline of traditional cigarette consumption. Tyler Crowe argues for a rating of eight, emphasizing the company’s continued strength in international markets where smoking remains prevalent, particularly outside the US (due to the Altria split). He notes that the decline in cigarette sales will likely be prolonged, offering PM a longer runway for revenue. Travis Hoium, assigning a six, expresses skepticism, citing a personal observation of lower smoking rates in the US compared to Europe (specifically France). He questions the long-term growth potential, particularly regarding the potential for a cultural shift away from smokeless products as well.

A key point is the company’s successful pivot towards smokeless products, which are becoming a significant part of their portfolio. Tyler highlights the growth potential in emerging markets where cigarette consumption is still rising.

II. Management Assessment

Both analysts acknowledge the quality of PM’s management team. Travis gives a rating of seven, recognizing their proactive move into the smokeless business and securing a foothold in the US market. He acknowledges they are “dealing with the cards they’re dealt” in a declining industry. Tyler awards an eight, praising CEO Jacek Olczak’s long tenure (30+ years) and deep understanding of the company. He specifically credits Olczak with driving the push into smokeless products, particularly the acquisition of Swedish Match and the success of Zyn nicotine pouches, which are currently the highest-selling product in that category.

Quote: “I like corporate lifers…probably knows the company more than almost anyone else.” – Tyler Crowe, on CEO Jacek Olczak.

III. Financial Analysis

The financial discussion focuses on the impressive growth of smokeless products, with a CAGR of 23% since 2018. Travis acknowledges this growth but expresses concern about potential cultural shifts impacting smokeless products, mirroring the decline in cigarette smoking. He also flags reliance on European and emerging markets as a risk, questioning the ethics of sustaining addiction in those regions. Tyler rates the financials a seven, praising the high returns and margins in the cigarette business, which require minimal reinvestment. However, he identifies a concern regarding dividend coverage, noting it has been “perilously thin” based on income and cash flow. He warns that a financial misstep could jeopardize the dividend, a key driver of value for PM.

Data Point: Smokeless products have experienced a 23% CAGR since 2018.

IV. Future Returns & Safety Assessment

Tyler Crowe predicts returns of 5-10% over the next five years, assigning a safety score of seven. He believes PM is unlikely to significantly outperform the market unless there’s a prolonged bear market. He emphasizes the company’s longevity due to smokeless products, but acknowledges risks from potential anti-vaping or anti-pouching campaigns. Travis Hoium is considerably more conservative, projecting returns of 0-5% with a safety score of five. He expresses low confidence in the continued growth of smokeless products and highlights the risk of regulatory backlash against nicotine products.

Quote: “If there is some a move for anti vaping or pouching, that is going to be a huge risk for the business.” – Travis Hoium, on the safety of PM’s future.

V. Overall Score & Next Steps

The overall score for Philip Morris International is 6.2 out of 10, reflecting the differing perspectives of Tyler Crowe and Travis Hoium. The discussion concludes with an announcement of the next stock to be analyzed: Cadence Design Systems.

Logical Connections:

The analysis progresses logically from assessing the core business strength and competitive landscape to evaluating management quality, financial performance, and ultimately, future prospects. The concerns raised about the long-term sustainability of both cigarette and smokeless product consumption are consistently woven throughout the discussion. The analysts’ differing viewpoints are presented and debated, providing a nuanced assessment of the stock.

Conclusion:

Philip Morris International presents a complex investment case. While the company demonstrates remarkable durability and a successful transition towards smokeless products, significant risks remain, including potential regulatory challenges and evolving consumer preferences. The analysts’ differing perspectives highlight the uncertainty surrounding the company’s long-term growth potential, making it a potentially stable but not exceptionally high-growth investment.