Philip Morris International Inc. PM shares are down 12.8% in the past six months on persistent rumors of a merger with Altria Group Inc MO and a wave of new controversy over vaping. However, Philip Morris got an upgrade on Tuesday as one analyst said the stock’s valuation and dividend yield limit potential downside.
The Analyst
Bank of America analyst Lisa Lewandowski upgraded Philip Morris from Neutral to Buy and reiterated her $96 price target.
The Thesis
Lewandowski said news that an Altria merger is off the table eliminated some overhang for Philip Morris shares. In addition, she said the recent negative media spotlight on vaping and the potential regulatory fallout could be a positive for Philip Morris.
“We think recent vaping illnesses and a rise in youth vaping will lead to stronger oversight over US tobacco, which we believe will benefit the compliant, scientific evidence based companies, such as PM and MO,” Lewandowski wrote in a note.
Not only does Philip Morris have limited exposure to the U.S. vaping market, its electronically heated tobacco system (IQOS) is FDA-approved. Lewandowski said IQOS also has limited appeal to minors, which should help it avoid intense media scrutiny.
With risks mostly in check, Lewandowski said Philip Morris shares trade at an attractive valuation at just 13.5 times forward earnings. In addition, the stock pays a generous 6.1% dividend while keeping its payout ratio around 90%.
Benzinga’s Take
Tobacco stocks certainly come with a negative connotation for many investors. However, with innovations such as vaping and IQOS along with increased investments in cannabis, tobacco companies could be in the early stages of a long-term transition away from the cancer-causing tobacco cigarettes that have been the lifeblood of the industry for decades.
Do you agree with this take? Email feedback@benzinga.com with your thoughts.
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© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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