I get that there is a large number of investors that simply want nothing to do with tobacco companies. I understand the reluctance to invest in such companies, but that reluctance can also create opportunity for investors who are willing to consider such stocks, asserts Chuck Carlson, editor of DRIP Investor.

Philip Morris International (PM) is a tobacco stock that has been transitioning to something more than just a provider of cigarettes. For example, a lot of investors might be surprised to know that smoke-free products constituted roughly one-quarter of the company’s sales in 2020 and should account for the majority of revenue by 2025.

Yes, the company still sells cigarettes — lots of cigarettes under the Marlboro, Parliament, Bond Street, Chesterfield, L&M, Lark, and Philip Morris brands. However, the company’s markets represent a fertile ground for expanding its smoke-free products.

Philip Morris International became an independent company when it was spun off from Altria in 2008. The spin-off separated the company’s U.S. business — Altria Group (MO) — and its international business, Philip Morris.

The company has been making great headway in expanding its IQOS “heat-not-burn” devices and consumables. The firm sold almost $7 billion of IQOS products in 2020, almost a quarter of total revenue and 35% in the three regions where IQOS is meaningfully present.

The firm has some 18 million users of its IQOS products and says it is only “scratching the surface” of the possible market. Philip Morris estimates there are some one billion smokers in the world, so there is a huge market for its smoke-free technology.

Philip Morris says IQOS is already the #5 nicotine brand in the world despite only being present in less than half of the world, and Philip Morris believes it could reach the #2 position just after its Marlboro brand by 2023.

The firm expects that smoke-free products will be around 40% of total revenue by 2023 and on the way to 50% by 2025.

The growth of IQOS, coupled with tailwinds from fewer Covid restrictions, should drive decent growth in 2021. Per-share profits should increase 15% on more than 8% revenue growth. Results could get a boost from improved duty-free business, which took a hit in 2020 from Covid-induced travel restrictions.

The stock is well positioned to benefit from the market’s pivot toward value and dividend payers — Philip Morris trades at just 15 times 2021 earnings estimates while yielding more than 5%. I expect these shares to outperform the broad market over the next 24 months.

Although the stock has improved in recent trading, Philip Morris shares reached nearly $124 in 2017. I think there is still ample room on the upside as more investors focus on the big product transition that is happening at the company.

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