Philip Morris International (NYSE: PM) stock has been on the rise, hitting new all-time highs in a strong U.S. stock market. Even though the tobacco giant has faced some challenges, it has also identified some strong areas for future growth. In addition, some of the adverse factors that have hurt Philip Morris' financial numbers in recent years might finally be starting to let up, offering the company the chance to see more of the benefits of its organic growth efforts. Below, you'll learn more about three key factors that could push Philip Morris stock even higher.
1. iQOS approval and adoption
Philip Morris has seen dramatic success from its iQOS heated-tobacco system. In Japan, the product has been on fire, grabbing up market share from traditional cigarette rivals and helping Philip Morris see hope for an industry that has faced a secular decline for years. In response, the company is working on test launches in other key markets elsewhere in the world, and it hopes that iQOS will get a similarly warm reception there.
Interestingly, the biggest potential win for Philip Morris could come in a market in which it doesn't do business. The company filed its modified risk tobacco product application with the U.S. Food and Drug Administration late last year, in which it sought approval for iQOS. If it gets FDA approval, Philip Morris will turn to partner Altria (NYSE: MO) to commercialize the product domestically. However, more importantly for Philip Morris, FDA approval will send a message to regulators elsewhere in the world that iQOS is a worthwhile product with advantages over traditional cigarettes. If Philip Morris, using its first-mover advantage, can get regulatory approval for iQOS before competitors do for similar products, then iQOS could receive a final boost in the markets that Philip Morris chooses as its next major release targets.
2. Foreign currency rebound
Philip Morris has taken a huge hit from the strengthening dollar in recent years. 2015 was the worst year from a currency perspective, costing the company billions in revenue and a substantial fraction of its earnings per share. Because Philip Morris does all of its business internationally, most of its revenue comes in the form of local currencies, and it therefore suffers when currency fluctuations go against the company.
However, things started to get better last year, and so far in 2017, the dollar's strength has actually turned into weakness. The euro has climbed from about $1.05 to $1.12 since the beginning of the year, and the dollar has fallen against the Japanese yen from 117 to 111. Not all foreign currencies have done as well, but with Philip Morris counting on Japan and the European Union for much of its revenue, those gains could finally give the company some long-awaited currency-based tailwinds. Moreover, with the dollar's drop coming even in the face of interest rate rises, even greater gains might be possible if the U.S. economy weakens compared to the rest of the world.
3. Dividend growth could return
Philip Morris has historically given shareholders healthy dividend growth, but over the past two years, that growth has all but evaporated. In both 2015 and 2016, Philip Morris raised its quarterly payout by only 2%, which compared very unfavorably to the increases of 10% to 20% that the tobacco giant routinely made earlier in its history.
Much of the pressure on Philip Morris dividends came from the currency impacts discussed above. In addition, other operational factors depressed profits enough that more extensive dividend increases wouldn't have been prudent. However, if Philip Morris can get itself back on a healthy growth track with respect to profits, then shareholders have a right to expect that the tobacco giant will honor its commitment to returning capital. Few expect a big dividend increase this year, so a surprise boost could push the stock higher.
Philip Morris International stock is already much higher than it has been recently, but there are still things that could send it higher. If these three things happen, then Philip Morris investors should share in the rewards.
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