Philip Morris's IQOS Technology Is Smoking Hot - Seeking Alpha

Philip Morris (PM) is a shareholder-friendly company that provides investors security and a steady stream of dividends. The Balance sheet appears extended, but the Company is at the forefront of a revolutionary tobacco consumption product that will offer an alternative to cigarettes, and vaping. This new technology, called IQOS (which stands for “I quit ordinary smoking”), will allow the company to leverage their widely popular Marlboro brand while providing a safer experience for tobacco consumers. This article will explain how IQOS technology can help Philip Morris increase future dividend income.

Fundamentals

Philip Morris currently has a historically high forward P/E of 23.84 and a more palpable trailing P/E of 20.18 that is still worrisome for a mature company that creates a product which many governments are increasingly trying to regulate.

There is nothing impressive about this company financial statistics when compared to their peers, or the broader S&P 500 stock index. The dividend rate looks appealing at 4%, but if you research further the Payout Ratio of 91.96% tells investors that this company is stretching their balance sheet to pay for this dividend.

International Hedge

A weak dollar will lift Philip Morris profits, If the US dollar weakens -this company will increase dividend payouts. Philip Morris is a good stock for investors that are seeking international exposure because all of their sales come outside the United States.

Excellent Management And Growth Ahead

Investors will sleep well at night knowing this company is run by a leadership team with a lengthy record of creating long-term value for their shareholders. Philip Gorham of Morningstar states” Our stewardship rating for Philip Morris International is Exemplary.” One reason for this rating is Management’s decision to suspend the share repurchase program. He is also excited about the company investment in IQOS technology ”Philip Morris' investment in iQOS, therefore, gives it early leadership of the category and sets the firm up well for long-term growth.”

Excitement Around IQOS Technology

Heat Not Burn (NYSEMKT:HNB) technology has similarities between both vaping and conventional cigarette smoking. A quote from an excellent Vapingpost article (here) sums up the difference between the technologies in a way a shareholder of Philip Morris will appreciate. “Unlike e-cigarettes that can be used with nicotine-free e-liquids, HNB cigarettes are tightly associated to nicotine, and specifically designed to reassemble to their combustible siblings. The combination of a tobacco stick and a heating element will offer the user to choose amongst the different brands, maybe the same he/she was used to, and select the tobacco stick that better fits to his/her taste.”

As a shareholder of Philip Morris, the fact that the consumer still uses the same brand is especially appealing for Philip Morris because they can still leverage the wildly popular Marlboro brand of cigarettes and convert e-cigarette users to the Marlboro brand.

Because heat sticks are so close to actual cigarettes, the new products will roll right into the existing distribution networks. HNB cigarettes still use tobacco leaf in sticks supplied in 20 packs that can be used at the same intervals as regular cigarettes. These sticks also burn like tobacco giving the user a similar experience. This differs from vapor technology in device appearance and consumer experience.

Below are the packages of Marlboros used in IQOS – very close in appearance to regular cigarettes. I recommend watching the full youtube video (here) - the Avail Vapor video creator describes the experience of using the IQOS, along with the current HNB competition.

Conclusion

A long-term focused investor will not regret buying PM at the current valuation, the growth associated with IQOS technology should provide a sustainable dividend far into the future. I also recommend taking a strong look at Altria (MO) because Altria shareholders will benefit from IQOS technology due to Altria claiming an exclusive partnership to distribute IQOS in the U.S., pending FDA approval. (To read more about IQOS Phillip Morris/Altria partnership, click here.)

Disclosure: I am/we are long MO, PM.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

http://ift.tt/2lAFw4U