Philip Morris International

Philip Morris International was split from Altria in 2008 to sell cigarettes everywhere except the United States. It still does: Marlboro outside America is PMI's, while Marlboro inside America belongs to Altria. In 2025 PMI shipped about 607 billion cigarettes, and its brands held about a quarter of the world's cigarette market outside China and the US.

The second half of the business is what PMI calls smoke-free. The largest piece is IQOS, a device that heats sticks of tobacco (sold as TEREA, HEETS and other names) instead of burning them; PMI says it has about three-quarters of the world's heated-tobacco volume, and more than 43 million adults use one of its smoke-free products. The second piece is ZYN, a small pouch of nicotine placed under the lip, which came with the purchase of Swedish Match in 2022 and is sold mainly in the United States. The third is VEEV, an e-cigarette. In 2025 smoke-free products brought in $16.9bn of PMI's $40.6bn of net revenue (41.5%) and nearly 43% of its gross profit.

How it makes money is simple. Nicotine is addictive, the products are cheap to make, and governments tax them heavily, which makes the shelf price high and the manufacturer's share of it small; a manufacturer that raises its share of the price by a few per cent a year barely changes what the smoker pays. PMI raised cigarette prices by 8.5%, 10.0% and 8.9% in the first three quarters of 2026 while volumes fell about 1%. That is pricing power of a kind very few businesses have, and it pays for the shift to smoke-free, which is where the growth is.

We should say plainly what we are analysing. Cigarettes kill a large share of the people who use them as intended. Many readers will not own this company for that reason, and we respect that decision. Our job is to tell those who do consider it what they would be buying, and at what price.

Two different things happened in this year, and an owner should keep them apart. The first was the business: PMI beat its own quarterly guidance three times, by a wide margin, and kept its full-year growth target before currency unchanged since February. Adjusted earnings per share for 2026 are guided at $8.29–8.44, about 10–12% above 2025's $7.54. That is excellent for a company whose main product is in decline.

The second was the price the market puts on those earnings. At the end of 2024 PMI traded at about 18 times adjusted earnings; at the end of 2025 about 21 times; today about 24 times. From 2021 to 2023 it traded at 16 to 19 times reported earnings. The share price has risen more than twice as fast as the earnings, and that difference is the market deciding that PMI is no longer a tobacco company but a consumer-staples compounder. It may be right. But the October results, which showed the smoke-free side slowing, were the first test of that view, and the shares now stand about 6% below the record they set on 4 November.

PMI's 2026 results are best read engine by engine. Cigarettes did better than anyone expected: prices up 8.5–10% a quarter, Marlboro's share of the international cigarette market at a record 11.4% in the third quarter, and volume down only about 1%. Part of the pricing is inflation passed through in countries like Turkey, Egypt and Argentina, where PMI accounts in hyperinflationary currencies, so it overstates growth in dollars. And the third quarter benefited from what PMI called a favourable restructuring of distribution terms in certain markets, "not expected to recur at the same level"; one broker estimated it added about three points to operating-profit growth in the quarter.

Heated tobacco slowed. In-market sales of IQOS sticks grew 10.9%, 5.1% and 7.1% in the three quarters, against double-digit growth for most of its history. Japan, IQOS's largest market, had two tax-driven price rises (April and October) that pulled buying forward and back; underlying Japanese growth was about 1% in the third quarter, and IQOS's share of the Japanese heated-tobacco category slipped from close to 70% to 68% as Japan Tobacco's Ploom pushed harder. Poland banned flavoured sticks in January. Outside Japan and Poland, growth was about 10%. International smoke-free revenue grew only 3.4% organically in the third quarter, partly because of the timing of shipments.

ZYN is Part VI. It fell 23.5% in the first quarter as American shops ran down their stocks, grew 1.8% and 4.2% in the next two, and its US profit is being spent on defending its share.

Reported and adjusted. PMI's reported earnings run well below its adjusted ones in 2026: $5.48 a share in the first nine months against $6.52 adjusted. The gap is real money in some cases and accounting in others. A $511m write-down of PMI's stake in its former Canadian subsidiary (Part XII) and losses on equity holdings are genuine losses of value; amortisation of the intangible assets bought with Swedish Match ($0.13 a share a quarter) is not a cash cost. We use adjusted earnings for valuation, as the market does, but remind the reader that for 2026 PMI guides reported EPS of only $7.11–7.26, slightly below 2025's $7.26.

By region, in 2025: Europe $17.1bn (42%), South and South-East Asia, the CIS, the Middle East and Africa $12.1bn (30%), East Asia, Australia and duty-free $6.6bn (16%) and the Americas $4.9bn (12%). From January 2026 PMI reports three segments instead: International Smoke-Free, International Combustibles and the United States. The US, where PMI sells ZYN and a little IQOS in Austin, Texas, was only 7.1% of revenue in the first nine months of 2026, and its operating profit fell 41% organically as PMI spent on ZYN.

The currency problem. More than 90% of PMI's revenue is earned outside the United States, and its dividend is paid in dollars. When the dollar strengthens, PMI's earnings in dollars shrink: in 2024 adjusted EPS grew 9.3% reported against 15.6% before currency. In 2026 the dollar helped (by about $0.18 a share). Over a decade, currency has more often cost PMI than helped it, and the euro, the Japanese yen and the Russian rouble are the three that matter most.

Russia. PMI still operates in Russia, which was about 7% of revenue in the first nine months of 2026. It holds $5.6bn of assets there, including $3.1bn of cash, mostly in roubles, which it cannot easily bring home. PMI warns that an exit would probably mean a material write-down. An owner should treat that cash as worth less than its book value.

Who pays whom. In this business the smoker pays, the government collects most of it, and the shareholder gets what is left after the tax collector has decided how much of each year's price rise to allow. That is why excise policy appears in every risk list PMI writes, and why the EU's planned reform of tobacco taxes, which would raise minimum excise on cigarettes sharply and set one for heated tobacco from about 2028, matters more to the long-term value of this company than any product launch.

A moat is tested by asking what a competitor with money and patience could take away. PMI's claims stand up better than most.

Our verdict is a moat of 8, built on intangible assets (Marlboro, IQOS, ZYN) and on habit, with the regulator acting as a wall around the market. The trend is mixed, and we think it is the most important thing to understand about PMI today: widening in cigarettes, where weaker rivals are leaving and Marlboro gains share; stable to slightly narrowing in heated tobacco, where Japan Tobacco and BAT are finally competing on price and quality; and narrowing in US pouches, where BAT's Velo Plus took share with a cheaper, stronger product and forced PMI to cut its price per pouch.

The deepest part of the moat is the oldest one. Marlboro's pricing is the reason PMI can spend billions on the new products without hurting its dividend. If that ever weakened, the whole structure would feel it. There is no sign of it yet: 2026 was the strongest year for cigarette pricing in PMI's history.

PMI paid about $14.5bn for control of Swedish Match in 2022 largely for ZYN, and for two years it looked like one of the best acquisitions in consumer goods. Supply could not keep up in 2024. In the third quarter of 2025 PMI shipped 205 million cans, up 37%. In 2025 as a whole it sold 794 million.

Then 2026 turned. In the first quarter, American shops cut their stocks and shipments fell 23.5%, although shoppers' purchases rose about 10%. In the second, sales were flat to slightly up in a growing category, which PMI attributed to an "uneven competitive landscape": BAT's Velo Plus, stronger and cheaper, took a large share of the growth. BAT reported its US modern-oral share at 29.8% in the first half of 2026, up 11.6 points in a year; Altria's on! slipped to 13.5% of the category. ZYN's own share recovered by more than a point between June and September, according to PMI, after the launch of stronger ZYN ULTRA pouches.

PMI's answer is the 20-pouch can. From the fourth quarter most of the range moves from 15 pouches a can to 20. Management said on the October call that this means about 25% less revenue per pouch, and that the US segment's adjusted operating profit will be about zero, or slightly negative, in the fourth quarter. That is a price cut by another name. It is probably the right decision: a leader that loses share in a young category can lose it for good. But it means that the American growth engine, which the market was paying for a year ago, will produce little profit for a while.

What cannot be known. Whether the US pouch market settles into a profitable duopoly, like American cigarettes, or into a price war, like vaping. Whether the FDA authorises ILUMA, and when. Whether America taxes pouches as lightly in five years as it does today. We do not know the answers, and neither does the market. What we do know is that the price today does not discount any of them going badly.

The pattern. In cigarettes, PMI's competitors are retreating and PMI is gaining share. In the new products, its competitors have caught up in the places where PMI was weakest: BAT in American pouches, Japan Tobacco in Japanese heated tobacco. Neither threatens PMI's leadership overall, but both ended the era in which PMI could grow smoke-free products at 15% a year without a fight. A business that has to spend to defend its share earns less on each sale. That is what the 2026 numbers began to show.

Across our board. We called Altria "own for income — it will not compound" at $68.65 and a 6.5% yield in August, and BAT "income — eyes open" at $60.56 in July. PMI is the better business of the three by some distance: it is growing, its smoke-free products are a larger share of the whole, and its cigarettes are gaining share. But it is priced as such: at about 24 times adjusted earnings and a 3.2% yield, half Altria's, an owner pays fully for that advantage.

Integrity. PMI's reporting is detailed and its targets are public, dated and kept: it set its 2026 growth target before currency in February and has not changed it since, while telling owners each quarter how much currency and one-off items moved the reported figure. It named the risks in October that the market then punished, rather than hiding them. We find nothing to question in its candour. What we would question is the pay: $29m for the chief executive and $26.9m for a departing finance chief, in a year when shareholders received no buybacks, is generous.

Capital allocation. Three decisions define this management. The first, starting long before 2021, was to spend heavily on smoke-free products when cigarettes were still very profitable: IQOS is the result, and it is the best new product in the industry in decades. The second was Swedish Match, bought for about $14.5bn in 2022 with borrowed money: ZYN has been worth it so far, though the 2026 price war has made the bet less certain than it looked in 2024. The third was to stop buying back shares after 2022 and use the cash to reduce debt: net debt to adjusted EBITDA fell from 2.53 times at the end of 2025 to 2.17 times in September 2026, against a target of about 2.0. PMI bought back about $37.6bn of its own shares between 2008 and 2014; since 2023 it has bought none, and its 2026–28 targets assume it will not.

The October call mentioned an investor day in the second quarter of 2027. If leverage reaches 2.0 times by then, the most useful thing PMI could announce for its owners would be a return to buybacks, but only at prices that make sense; at 24 times earnings, they would not.

At 30 September 2026 PMI had $47.6bn of debt and $6.7bn of cash: net debt of $40.9bn, or 2.17 times the last twelve months' adjusted EBITDA of $18.8bn. Most of the debt is in dollars at an average coupon of 4.7%; about $6bn is in euros at 2.2%. The next large maturity is $6.8bn in 2027, including the last €1.5bn of the Swedish Match term loan due in June. PMI has $6bn of undrawn bank lines. Moody's rates it A2 with a positive outlook, S&P A− (positive) and Fitch A. Operating profit covers net interest about 15 times.

Negative equity. PMI's balance sheet shows shareholders' equity of −$7.9bn. That looks alarming and is not. PMI was spun off with little equity, has paid out almost all of its earnings as dividends since, bought back $37.6bn of shares between 2008 and 2014, and carries $11.9bn of accumulated currency and pension losses through equity. A company that has returned more cash than it kept will show negative book value. It means ratios like return on equity and price-to-book are meaningless here. It does not mean PMI cannot pay its debts: it can, comfortably, from cash flow.

The accounting seams. Reported earnings in 2026 include a $511m write-down of PMI's stake in Rothmans, Benson & Hedges, its former Canadian subsidiary, after Canada's tobacco settlement (Part XII), losses on equity holdings, and the cost of buying out a Dutch pension plan. Operating cash flow over the last twelve months ($15.2bn) includes a one-off $682m refund from a German pension surplus; PMI's own guide for 2026 is about $13.5bn.

On 18 September 2026 PMI raised its quarterly dividend by 8.8%, from $1.47 to $1.60, after an 8.9% rise a year earlier. At $6.40 a year the yield is 3.2%, the lowest since at least 2021 (it was 5.5% at the end of 2023). PMI has raised the dividend every year since it became a public company in 2008, a total increase of 248%. For most of that time the raises were small (1.6% in 2022, 2.4% in 2023) because the dividend already took almost all of PMI's earnings: reported EPS did not cover it in 2017, 2019, 2023 or 2024. The faster raises of 2025 and 2026 came after earnings jumped.

Our reading. The dividend is safe, and it is the whole of the capital return: PMI pays out about three-quarters of its adjusted earnings and 83% of its expected free cash flow, and keeps the rest for debt. The recent raises of almost 9% a year are more generous than the business can sustain if its earnings grow at the low end of its target of 9–11% before currency, because currency will not always help. We expect the raises to settle back to something like 5–7% a year. An owner buying today for income gets 3.2%, growing at perhaps 6%: a reasonable return, but not the 5% yields that were available in 2021–2023, when the business was less proven and the price was lower.

The lenses agree within a few points: PMI costs 22–26 times what it earns, however one measures it. For a tobacco company that is a historic high. For a consumer company growing earnings at 9–11% a year it would be fair. The valuation question is which of those two PMI will be over the next decade.

Our method. We start from the 2026 adjusted EPS midpoint ($8.37), grow it to 2030 at a rate that reflects each case, apply an exit multiple, discount 4.1 years at 10%, and add the dividends received on the way (about $23 a share in present value).

The cases. "Smoke-free stalls" has the US pouch war and slower heated tobacco hold growth at 4% a year, roughly cigarette pricing minus volume, with the market paying 15 times, below the 16–19 times of 2021–23. The middle case has PMI deliver its 9–11% target before currency, less about two points a year lost to the dollar, as has happened over most of the last decade, and a multiple of 18, near the top of the 2021–23 range. "The smoke-free compounder" has the top of the target, every year, in dollars, and the market paying 22 times, close to today.

The middle case moves to about $146 at 16 times and $177 at 20 times; to $151 at 6% growth and $172 at 10%. What is priced in? At $198.96 and 20 times earnings in 2030, PMI must grow adjusted EPS by about 12% a year in dollars for four years, above the top of its own target range, which is before currency. At 22 times, it needs 9% a year. The price assumes either that PMI beats its own targets or that a tobacco company keeps a staples multiple through the EU's tax reform and a pouch price war. Both are possible. Neither is a margin of safety.

Margin of safety. PMI is a business with an exceptional franchise, uncertain rules and a full balance sheet; we place it in the "uncertainty present" tier, which asks for a 40–50% discount to a central value we are confident in. We cannot ask for that on a business this good without waiting forever. The price is within our range, about 24% above our central value. We would add near $165: a 3.9% yield, about 18 times 2027 consensus, and roughly where the shares closed March 2026, eight months ago.