By Brian Nelson, CFA
On April 20, Philip Morris International Inc. (PM) reported first-quarter 2023 results that were about in-line with expectations. On a pro forma basis, including Swedish Match, the company’s adjusted net revenue growth came in at 3.8%, excluding currency movements, thanks largely to smoke-free product sales expansion and strong pricing growth across its legacy combustible tobacco business. We’re not making any changes to our $105 per-share fair value estimate as a result of the quarterly performance.
The cigarette maker noted that it continues to integrate Swedish Match successfully and that it continues to make progress toward its smoke-free goals. Smoke-free revenue was up 3.4 percentage points of total revenue on a year-over-year basis in the first quarter of 2023, to 34.9%, as cigarette volumes continue to decline, falling 3.1% in the quarter.
It’s easy to be skeptical of a company working aggressively to replace nearly two thirds of its smoking business with smoke-free alternatives, but Philip Morris continues to make progress, and its recent deal for Swedish Match has accelerated its efforts.
Philip Morris didn’t make any changes to its 2023 financial targets. For the year, the firm is looking for organic net revenue expansion in the range of 7%-8.5% and currency-neutral adjusted diluted earnings per share growth in the range of 7%-9%, to $6.40-$6.52 per share, which handily covers its annualized dividend rate of $5.08 per share.
Philip Morris will have to battle through cost pressures and supply chain inefficiencies to hit its full-year target ranges, and we’re watching its operating margin closely (the measure declined ~5.8 percentage points on an adjusted basis during the first quarter). However, its business is predictable enough that we’re not too worried. Investors should expect cigarette volumes to continue to face pressure.
Image: Philip Morris’ smoke-free product portfolio. Image Source: Philip Morris’ 2022 Form 10-K.
Philip Morris has a lot of work to do to fully transition to a majority smoke-free company, but it continues to make progress, while growing its top line and driving earnings expansion along the way. The company’s smoke-free portfolio (IQOS 3, ILUMA, BONDS, VEVV, Snus, ZYN) is innovative, and it continues to gain market share for HTUs in its IQOS markets.
It will be difficult for Philip Morris to hold the line with respect to margins this year even with the firm’s pricing power, but things are looking okay, from where we stand. Free cash flow for 2023 is targeted in the range of $8.7-$9.7 billion, a range comfortably higher than the $7.8 billion and $7.6 billion in cash dividends paid in 2022 and 2021, respectively.
We like that Philip Morris has raised its quarterly dividend by more than 170% since it became a public company in 2008, reflecting a compound annual growth rate of ~7.5%, and further growth in the dividend payout should ensue. The company’s Dividend Cushion ratio stands at 1.0, but the mediocre ratio is more of a function of the company’s large net debt position than anything else, as free cash flow generation remains robust. Shares of Philip Morris yield ~5% at the time of this writing.
NOW READ: The Dividend Cushion Ratio: Unadjusted Is Less Subjective, Adjusted Is More Subjective
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Tickerized for PM, SWMAY, MO, BTI, IMBBY, JAPAY, VGR, RLX
Brian Nelson owns shares in SPY, SCHG, QQQ, DIA, VOT, BITO, RSP, and IWM. Valuentum owns SPY, SCHG, QQQ, VOO, and DIA. Brian Nelson’s household owns shares in HON, DIS, HAS, NKE, DIA, and RSP. Some of the other securities written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.
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