Last month, I helped a turtle cross a road. It was more of a bike path, technically, and my role was limited to encouraging words, but still. This past week, I returned a shopping cart to the parking lot corral even though I’m pretty sure I remember it raining, or at the very least, threatening to rain. I can probably come up with even more noble stuff I’ve done if you give me some time.
Don’t get me wrong: I’m no
Philip Morris International
(ticker: PM). At the end of last month, the cigarette giant published Integrated Report 2019, its first comprehensive update on ESG issues—that stands for environmental, social, and governance. It spans 192 pages. That’s 54 more than the company’s annual financial report to shareholders.
Let’s just say that Unicef had better raise its game: Its good deeds last year fill only 68 report pages, and two of those are shout-outs to big donors.
“Our sustainability report is not focusing on how beautiful Philip Morris is going to look, but what matters to stakeholders in our company,” CEO André Calantzopoulos told me this past week. “Admittedly, it is long.”
Cigarettes used to be the ultimate sin investment. Shares of the old Philip Morris, called
(MO) since 2003, returned an average of 19% a year over three decades ended mid-2017, versus 10% for the S&P 500 index. Regulatory crackdowns didn’t hurt much. A ban on television advertising that started in the 1970s left cash flow and dividends rich.
High state excise taxes made price increases less noticeable, so cigarette companies were able to offset gradually falling demand.
Tobacco shares have mostly slumped in the past few years, since vaping took off, cutting into cigarette sales.
bought a stake in Juul Labs, the vaping market leader, in 2018, but that backfired when it turned out that millions of high-schoolers were vaping, and some states sued.
Philip Morris International, which sells cigarette brands such as Marlboro, Parliament, and Virginia Slims outside the U.S. and was spun out from Altria in 2008, took a different approach. It piloted the IQOS tobacco-heating system in Japan and Italy in 2014, and then in 2016, announced its new goal of delivering a “smoke-free future.”
This month, the FDA gave the company permission to market IQOS as safer than cigarettes.
It’s the second tobacco product to get that nod; the first, last October, was General Snus, tobacco-containing pouches made by
(SWMA. Sweden) that are put between the lips and gums.
Unlike with dipping tobacco, you don’t have to continuously spit to keep from getting sick—the jingle writes itself.
IQOS consists of packs of tobacco sticks called HEETs, which are put into a rechargeable device to heat them just enough to emit nicotine-containing vapor.
The company says most of the harm from cigarettes comes from the smoke, not the nicotine.
Calantzopoulos tells me that the average IQOS user is over 35; that his research shows IQOS users are much more likely than vapers to kick cigarettes for good; and that the reason for this is the experience.
“It’s much closer to the taste of a cigarette,” he says. “If a cigarette is like a full-bodied red wine, IQOS would be something like wine with ice cubes, and any vapor product is water in which you put alcohol and add some flavoring to give it taste.”
I find that argument persuasive, mostly because I’ve been drinking wine on ice all summer.
Philip Morris’s second-quarter financial results, reported this past Tuesday, showed revenue and earnings declining, but not by as much as expected, and business picked up in June.
UBS analyst Robert Rampton, who is bullish on the stock, writes that cigarettes were one of the best-performing consumer staples during the global financial crisis a decade ago, and that he expects the same in coming quarters—and that IQOS provides a good hedge for quitting. During the second quarter, cigarette volumes fell 17.6%, but heated tobacco volumes shot 24.3% higher. Shares rose 4% on the report.
Philip Morris says its heated tobacco products have gotten 11 million former smokers to switch. It’s shooting for 40 million by 2025.
Wall Street predicts earnings per share will rise 45% cumulatively between this year and then. Shares trade at 15 times this year’s projected earnings. The dividend yield is a full-flavor 6%.
I’m skeptical about the need for reduced-risk nicotine. I quit smoking after my children were born, and after reading a book that said the main thing that makes people want nicotine is the most recent dose they’ve had, and that if you can quit altogether for three weeks, it’s easy after that.
I reckon I’ve saved $20,000 on cigarettes since then, which I’ve reallocated to Big Macs and errant golf balls.
Smoking kills eight million people a year worldwide, the World Health Organization says. That’s out of 57 million deaths from all causes, which makes it kind of a biggie.
Calantzopoulos says the voluminous ESG reporting is an effort to convince ethics-minded investors that tobacco companies aren’t all the same, and that it’s better to engage with Philip Morris than shun it.
According to Morningstar, ESG funds last year took in net cash of more than $20 billion, four times the figure the year before. More than 500 funds added ESG language to their prospectuses.
Here’s hoping all that do-good pivoting does some good. I’m curious to see whether it can redeem a tobacco merchant from sin-stock status, and earn it a place in pious portfolios.