The last year has been a tough one for the Philip Morris International Inc. (NYSE:PM) stock price. It is down by around 30% as investors have become increasingly unsure about the prospects for the wider tobacco industry.
Tighter regulations on tobacco are not only being put in place in the US. Across the developed and developing world, governments are cracking-down on areas such as packaging and smoking in public spaces. The result is a gradual fall in cigarette volumes which is affecting all of the global majors.
In response, Philip Morris continues to pursue a strategy that involves raising prices for its cigarettes. This has worked well in recent years, with price rises more than fully offsetting volume declines in order to provide the company with improving EPS numbers. In turn, this has allowed dividend growth to continue.
In the long run, this move is unsustainable, since the number of smokers is likely to continue to fall as prices rise. In response, then, the company’s investment in reduced-risk products could really payoff. So far, take-up of products such as e-cigarettes and heated tobacco has been encouraging, and the segment is expected to grow rapidly over the next few years.
In my view, as technology within reduced-risk products improved, a greater proportion of smokers will switch over from cigarettes. Therefore, in the long run I feel that there could be growth opportunities, with there being less incentive to quit reduced-risk products versus cigarettes, since they will likely be less harmful.
As a result, while the Philip Morris stock price could remain unpopular in the short run, in the long term I feel the company has investment potential. It could deliver strong EPS growth from rising demand for new products, while pricing power in cigarettes could help it to offset further volume declines on a global basis.