Why Philip Morris' Next-Generation Products and Juicy Dividend Make It a Strong Investment Opportunity

Next-generation growth

Philip Morris cut its teeth selling Marlboro cigarettes in non-U.S. markets, but it has spent years developing new revenue streams that should eventually carry the business as people smoke fewer combustible products. Those are IQOS and Zyn. IQOS is a device that heats tobacco to produce a vapor but doesn't burn the tobacco, decreasing the amount of toxins users inhale. Meanwhile, Zyn is an oral pouch that contains flavored nicotine powder.

The company hopes these next-generation products will contribute at least two-thirds of total revenue by 2030, up from 36.4% last year.

Philip Morris bought Swedish Match in 2022 to acquire the Zyn brand. It's the global leader in nicotine pouches, a rapidly growing product category. Trailing-12-month shipment volumes hit 385 million cans in Q4 2023, up 62% year over year. That volume growth is rare in the nicotine space, so it's an exciting long-term development for investors.

A juicy dividend

Tobacco stocks are famous for having big dividend yields, and Philip Morris fits the bill at 5.7%. Admittedly, the dividend payout ratio is tight at 101% of cash flow, but the company has invested heavily in growing Zyn's capacity and sales since acquiring the brand in 2022.

Shares are priced for solid investment returns

Today, shares trade at a forward P/E ratio of 14, and analysts believe the company can grow earnings 7% annually over the next three to five years. Assuming the valuation remains the same, investors could see over 12% annual returns. The stock could be a little expensive; its PEG ratio is 2, and I like to buy stocks when the PEG is 1.5 or less. The PEG ratio tells investors how much they're paying for that company's earnings growth -- lower is better.

Eventual share repurchases could set the company up for prolonged earnings and dividend growth -- just rinse and repeat.