Philip Morris International

IThe business

Philip Morris International sells cigarettes. That is the plain description, and it is most of the profit. It also sells newer nicotine products that it says are less harmful than smoking, and it spends a large share of its effort trying to move smokers to them. But Marlboro, the best-selling international cigarette brand, was about 43% of the company’s cigarette shipments in 2025, and the company sells cigarettes in around 170 markets.² Cigarettes and other combustible products were still 58.5% of revenue in 2025 and 58.4% in the first nine months of 2026 C (calculated).²⁵

It is worth saying what that means for an owner before any numbers. Smoking causes cancer, heart disease and lung disease; the company says so itself, and it calls its aim a smoke-free future.² The product is legal in most places, heavily taxed, banned from advertising in many, and the subject of lawsuits that have run for thirty years. Some pension funds and endowments will not own it at all. That is a choice about values and I do not argue for or against it here. For the analysis, it means three things. Demand is made of habit and addiction, which is why price rises stick. The rules can change faster than for almost any other consumer business, and a tax or a ban can remove a market. And the company must keep proving to governments that its newer products are different from cigarettes, because most of its future profit depends on that.

The company is a Virginia holding company run from Lausanne, Switzerland, with its American base in Stamford, Connecticut. It employs about 84,900 people, 96% of them outside the United States and about 29% in Indonesia.²⁶ I picked it partly because it is the largest company headquartered in Connecticut by market value. That is not a screen for cheap shares, and as you will see the price is not below my base value.

What it sells, in units

Volume is counted in “equivalent units”, a cigarette or its heated or pouch equivalent. In 2025 the company shipped 786.5 billion, up 1.4%. Smoke-free products were 179.1 billion of that, up 12.8%, and cigarettes were 607.4 billion, down 1.5%.² Total volume has grown every year from 2021 to 2025, and the company says it is on course for a sixth year.²⁴ That is new. From 2016 to 2020 the total of cigarettes and heated units fell from 820 billion to 705 billion, a loss of 14%, though Canada’s subsidiary was in the 2016 figure.⁸⁹

Smoke-free was 41.5% of net revenue in 2025 ($16.9B of $40.6B) and 41.6% in the first nine months of 2026 ($13.6B of $32.8B).²⁵ It is in 110 markets, and the company says over 43 million adult consumers used its smoke-free products at the end of 2025.⁴ IQOS is the heated tobacco brand; it heats a tobacco stick rather than burning it. ZYN is a nicotine pouch that goes under the lip, without tobacco leaf. VEEV is the vape. All three contain nicotine, which is addictive, and the company’s claim is only that they expose users to far lower levels of harmful chemicals than smoke does.²

Where the money goes

Every pack carries a tax. In 2025 PMI’s customers paid $53.2B of excise and sales taxes on top of the $40.6B that the company records as net revenue.³² Of each dollar spent at the wholesale level, the company kept about 43 cents and governments took the rest C (calculated). This is why a government decision matters more here than at any food or soap maker: a rise in a tax can shift a smoker to a cheaper brand or to illicit supply, and a change in how a product is classified can change its tax overnight.

Starting in 2026, the company reports three segments instead of four regions. The change shows how the business thinks of itself.

International Smoke-Free is heated tobacco and vapor outside the United States. International Combustibles is cigarettes outside the United States. The U.S. segment is mostly ZYN. Smoke-free carries a 70.0% gross margin, a little above cigarettes at 68.0%, so the move to the new products is not a move to lower margins.⁵ The U.S. margin of 63.4% is lower and falling, for a reason I come back to: ZYN is under attack on price.

The cigarette engine

For nine months of 2026, net revenue rose 5.9% on an organic basis. Price added $1,889M, or 6.2 points. Volume and mix subtracted $89M.⁴ So all of the organic growth, and a little more, was price. In the third quarter, International Combustibles raised its price by 8.9%, and the company said part of that came from restructuring distribution terms in some markets, a gain it does not expect to recur at the same level.⁴⁵ Cigarette shipments in the quarter were flat at 158.0 billion, with gains in Turkey, Indonesia and Egypt offsetting drops in Russia, Poland and Japan.⁴

This is a business of selling a shrinking number of cigarettes at higher prices, and doing it well. The industry outside China and the United States was 2,587 billion cigarettes and heated units in 2025 and has hardly moved; the company’s share of it rose from 28.6% in 2023 to 29.2% in 2025, with cigarettes slipping from 23.8% to 23.4% and heated units rising from 4.7% to 5.8%.² Altria, the U.S. cigarette maker, reported domestic cigarette shipments down 2.9% in the third quarter, an estimated 4% after stock movements.¹¹ PMI’s international market is falling more slowly, which is why the pricing works.

The three growth brands

IQOS. The company holds about three quarters of the heated tobacco category by volume. In the third quarter IQOS units shipped rose 1.5% to 41.5 billion, and adjusted in-market sales, which strips out distributor stock, rose 7.1%; excluding Japan and Poland they rose 10%.⁴ In Japan, its largest market, IQOS holds about 68% of the heated category. Japan is also where the tax is changing: the heated product’s excise is being raised to the cigarette level in two steps, on 1 April and 1 October 2026, which brought price rises of ¥40 and ¥20 a pack.⁴² Net revenue from customers in Japan was $4.2B in 2025, 10% of the total.² Poland banned characterising flavours in heated tobacco, which is dragging that market down.⁴ In the U.S., the company has held the full rights to IQOS since April 2024. The FDA accepted the application for the newer ILUMA device in March 2024, and the latest 10-Q still shows it under review.²⁵

ZYN. The company bought it with Swedish Match in 2022. ZYN is the leading nicotine pouch in the United States, with a category value share the proxy puts above 60% for 2025.⁶ The FDA authorized 20 ZYN flavours in January 2025 and, in June 2026, allowed the company to say that using ZYN instead of cigarettes lowers the risk of mouth cancer, heart disease, lung cancer, stroke, emphysema and chronic bronchitis. Those 20 are the only pouches on the U.S. market with that authorization.⁵ In August 2026 it authorised 11 more variants, ZYN ULTRA, for 31 in total.⁴ Yet U.S. shipments fell 6.0% in the first nine months to 8.4 billion pouches, mostly on stock movements in the first quarter, and rose 4.2% in the third.⁵ The U.S. segment’s adjusted operating companies income fell 41% on an organic basis, to $550M for nine months.⁴

The fourth quarter is the part to read closely. The company is moving most of its flagship ZYN range from 15 pouches a can to 20, which it says cuts revenue per pouch by about 25% if all else is equal, and it is increasing marketing. It says to expect an abnormally low level of U.S. profit in the fourth quarter.⁵ Altria’s on! PLUS and British American Tobacco’s Velo Plus are the rivals. Altria says nicotine pouches reached 61.2% of the U.S. oral tobacco category in the third quarter, with its own on! at 13.5% of pouches, down 1.3 points in a year.¹² The company is spending to defend a lead in a category that is growing fast and that the rivals have entered.

VEEV. A small but quickly growing vape: shipments rose 61.6% in the third quarter and 68.1% in nine months, to 4.0 billion units, in markets such as Romania, Greece, France and Spain.⁴ It is allowed in far fewer places than IQOS, and e-vapor is where regulation has been hardest, so I treat it as an option and not as a base of value.

The third quarter of 2026

The most recent quarter, reported on 21 October, was a record for revenue, gross profit and operating income. Net revenue rose 5.5% to $11.4B, or 7.1% organically. Operating income rose 14.1% to $4.9B. Adjusted EPS rose 5.4% to $2.36. Reported EPS fell 4.9% to $2.12 because of a non-cash change in the value of equity investments.⁴ The company changed its forecast for the year only for currency. Adjusted EPS is forecast at $8.29 to $8.44, up 9.9% to 11.9%, against $8.38 to $8.53 in February; excluding currency the forecast is unchanged at 7.5% to 9.5%, and the currency tailwind in it fell from $0.27 a share to $0.18.⁴¹³ It assumes organic revenue growth of 5% to 7%, organic operating income growth of 7% to 9%, operating cash flow of about $13.5B, capital spending of $1.4B to $1.6B, and no share repurchases.⁴ It also raised the quarterly dividend by 8.8%, to $1.60 a share.⁴ The shares closed at $211.28 on 4 November, 32% above the last close of 2025 C (calculated).¹

IIThe moat

An advantage that lasts is a cost or a habit that a rival with money and talent can’t copy in a reasonable time. A cigarette company has some of the oldest ones in consumer goods. It also has a legal tail and a regulatory risk that no soap or soda maker carries. I look at both.

The loop is simple. Smokers keep buying, so the company can raise price. Higher price funds the science and the factories for newer products. Newer products keep customers from leaving the company even as they leave cigarettes. The company’s stated goal is to stop selling cigarettes altogether, and its pay plan scores executives on phasing them out.²⁶ That is an odd aim for a business that earns most of its profit from them, and it is the company’s answer to a question the regulators and the public keep asking.

The approvals are part of the advantage

In the United States the FDA must authorise a new tobacco product before it can be sold. A company has to show the product is appropriate for the protection of public health. That process took the company years, and cost it more than $16 billion since 2008 on smoke-free science and products.² Rivals have to do the same, and the fact that they have done so for pouches (Altria’s on! PLUS is on sale) shows that the barrier can be crossed.¹¹ The 10-K adds that some competitors have recently marketed, or said they intend to market, pouches whose applications were still pending, which suggests the FDA’s approach is looser than the formal process.² I read that as an advantage that is real but not fixed.

Evidence it is holding

• The company’s share of the international cigarette and heated market rose to 29.2% in 2025 from 28.6% in 2023, with Marlboro gaining share in the third quarter of 2026.²⁵
• Heated tobacco units gained 1.0 point to 9.9% of the combined industry in the markets where they are sold.⁴
• Gross margin rose from 64.8% in 2016 to 67.1% in 2025 C (calculated).³

Evidence it is thinner than it looks

• Organic revenue growth in nine months came from price. Volume and mix were slightly negative.⁴
• U.S. profit from ZYN fell by 41% organically in nine months, and the company expects an unusually low fourth quarter as it cuts the price per pouch to keep a lead.⁴⁵
• Rules are closing the gap between heated tobacco and cigarettes. Japan is moving the heated tax to the cigarette rate. The EU’s proposed excise law would tax heated tobacco and pouches from 2028, with four more years to adapt.² Poland has already banned flavours in heated tobacco.⁴
• Part of the third-quarter gain in international cigarette revenue came from a change in distribution terms that the company does not expect to repeat at that level.⁴

On balance I think the advantage is wide for cigarettes, still forming for the new products, and exposed to rules at every point. The company can raise price on smokers for a long while, and it has a real lead in heated tobacco and pouches. What it cannot do is control the tax and the law. Most of what these advantages protect is a large stream of cash, not an accelerating one.

IIIThe competitive advantage

The cleanest way to see what kind of business this is, is to put it next to the others. Altria is the closest in what it sells, but I have no page on it, so I use its latest filings. Coca-Cola and Procter & Gamble are the closest in how the business behaves: habit, global brands, little capital and steady payouts. I wrote their pages with the same method.

Three things in the table matter. First, this is a much higher-margin business than either consumer-goods name: an operating margin near 37% reported, 43% adjusted, against 29% for Coca-Cola and 24% for P&G. Second, among the three pages with a base value, Philip Morris has the highest premium to it (42% against 29% and 34%) and the lowest return at the price. The market is paying more for it than for either of the others, though its risks are different and larger. Third, the Altria comparison shows what a pure U.S. cigarette business looks like: shipments falling 3% to 4% a year, EPS growth guided at about 5%. PMI’s growth is double that because 42% of its sales are smoke-free and because it sells in places, such as Indonesia, Turkey and Egypt, where smokers are still increasing or holding.⁴¹¹

The better comparison for the numbers is Coca-Cola. Both live off a habit at a high margin, and both took most of their recent growth from price. Coca-Cola’s dividend yield is 2.2%. PMI’s is 3.0%, with a plan for 6% to 8% organic revenue growth, and for that it carries a legal tail and a rule book that Coca-Cola does not.¹⁴ I come back to this in the valuation. Coca-Cola and Procter & Gamble have their own pages.

Where it wins

• Where smokers are many and income is rising: Indonesia, Turkey, Egypt, the Philippines and India, where cigarette shipments grew or held in 2026.⁴²
• Heated tobacco in rich markets, where it holds three quarters of the category by volume with national shares of 20% in Italy, 27% in Greece and 33% in Japan of cigarette and heated sales at the end of 2025.⁴¹⁴
• U.S. pouches, where it has the only products with an authorised risk claim, and its brand leads the category.⁵⁶
• Cash. The company turns about 30% of its net revenue into operating cash flow, with capital spending of $1.5B a year.²

Where it loses, or is tested

• Markets where the product is not allowed. The 10-K names Argentina, Brazil, Canada, France, India, Mexico, Turkey, Australia, Thailand and Vietnam as markets that have banned or severely restricted one or more smoke-free categories.²
• The U.S. pouch fight, where the company is cutting price per pouch and spending more.⁵

IVManagement

The company is run by people who have been in the business for decades and who have changed its direction without changing the leadership. Jacek Olczak became chief executive in May 2021 and took the title Group CEO in January 2026. He had been chief operating officer from 2018 and chief financial officer from 2012 to 2017.⁶ André Calantzopoulos, who ran the company before him, is still chairman. He retired as an officer in 2024.⁶ So the same two men have steered the company through its whole move from cigarettes to smoke-free products.

Two things in that table. The team is stable at the top and has just changed the finance chief, which is the person who talks to investors about the coming fourth quarter. And the leaders are insiders who have worked on the cigarette business and the pivot at the same time.

Pay, and what it pays them to do

Olczak’s reported pay for 2025 was $29.1M: salary of $1.8M, stock awards of $18.0M, an annual cash incentive of $5.2M and a $4.0M increase in the value of his pension.⁶ The pay ratio against the median employee, using the plain figure, is 672 to 1.⁶ Pay has two engines. The annual cash incentive paid him 276% of salary for 2025 against a target of 200%.⁶ The long-term award is 60% performance shares and 40% restricted shares. The performance shares have three parts: 40% is the company’s share price return against peers, 30% is the compound growth in adjusted earnings per share excluding currency, and 30% is a sustainability index.⁶ The 2023 to 2025 cycle paid out at 190% of target. Earnings growth was 13.6% a year, well above the 10.5% that earned the maximum, and the share return placed in the 85th percentile of peers.⁶

So follow the money. The plan pays for adjusted earnings growth and for beating other consumer companies’ share prices. That is sensible, and it has paid out a lot for results that were good. But there are three gaps. Nothing measures return on the capital employed, or the cash an owner can take out. “Adjusted” earnings leave out the amortisation of intangibles bought with real money, restructuring that has recurred in each of the last two years, and fair-value swings. And the company’s public earnings target excludes buybacks, so there is no reward for buying shares back cheaply.¹⁴ One fifth of the performance shares, the product part of the sustainability index, scores progress on phasing out cigarettes among other aims.⁶ That is a fair thing to reward in a plan whose stated aim is a smoke-free future. It does not line up neatly with the owners’ interest in the profit those cigarettes earn.

Their own money

Olczak is listed with 500,844 shares, worth about $106M at $211.28 C (calculated), including deferred stock.⁶¹ That is about three and a half times his 2025 pay. Chairman Calantzopoulos is listed with 986,075 shares, though he disclaims ownership of 398,412 of them.⁶ The 17 directors and executive officers together own 2,027,200 shares, about $428M and 0.13% of the company C (calculated).⁶¹ That is real money for the individuals and a rounding error against a company worth $330B. The 5% holders in the proxy are index and fund managers: Vanguard 8.57%, Capital World Investors 8.17%, Capital International Investors 6.61% and BlackRock 6.22%, each as of a filing date from 2023 to 2025 that the proxy gives.⁶

Among the funds I checked, the changes are worth noting, as holdings and not as opinions. Fundsmith held 6,124,597 shares at the end of 2025, 5,113,163 at 31 March 2026 and 2,913,693 at 30 June 2026, a drop of 52% in two quarters.¹⁵ Gardner Russo & Quinn trimmed from 4,697,508 to 4,530,846 shares over the same two quarters.¹⁶ Lone Pine Capital held 2,643,579 shares at the end of 2025 and no line for the company at 30 June 2026.¹⁷ Berkshire Hathaway, Baupost and ARK show no line at 30 June 2026 and Pershing Square none at 31 March 2026. I found no written statement from any of them about this company, so I draw nothing from these holdings beyond the fact that they changed.

What they did with the money, over a full cycle

I take 2016 to 2025 as the cycle. It covers the deconsolidation of Canada’s subsidiary, a pandemic, the purchase of Swedish Match, a Russian invasion and a long run of higher interest rates. Over those ten years the company produced $102.8B of operating cash. It spent $11.8B on capital projects, paid $74.5B in dividends and bought back $1.0B of stock C (calculated).³

Three things stand out. First, the dividend: it took 84% of the cash left after capital spending and stock pay over ten years, and rises every year.³ Second, buybacks stopped in 2015. The company bought back $37.6B of stock from 2008 to 2014, then almost nothing, and it has said it will buy none in 2026.³⁴ The share count is the same as in 2015, so a decade of earnings growth went to the dividend and to debt, not to a smaller share count. Third, the diversification away from tobacco has not worked yet. The wellness business and the investment in Canada have been written down heavily, and the cost of Swedish Match was paid for with debt. These were choices with a sound reason at the time. They are the part of the record that the pay plan does not look at.

The return on the capital employed is high on the accounts: operating income after a 21.5% tax, about $11.7B, over invested capital of about $36B (debt less cash, plus a stockholders’ deficit of $8.0B) gives roughly 33% for 2025 C (calculated).² The company itself says its average over ten years was above 50%, a figure I did not test.¹⁴ The accounts flatter the figure, because buybacks and dividends of past years shrank the equity to a deficit. The Swedish Match goodwill is in it, so the true return on what was paid is lower.

VFinancials

Philip Morris’s accounts are clean in structure and noisy in detail. There are three reasons. The company reports in dollars but earns almost nothing in them. It adds back a set of items to reach an “adjusted” profit that it, and its pay plan, use. And a few large non-cash items, in Canada, in wellness and in equity investments, move the reported figure from year to year. The simplest honest way to read the numbers is to find the cash.

Margins

Operating margin as reported was 40.9% in 2016 and 36.6% in 2025 C (calculated).³ The low was 32.9% in 2023, when it carried an impairment of $680M, a $204M indirect tax charge in South Korea and amortisation of acquired intangibles that had risen from $0.2B in 2022 to $0.5B.¹⁴³ Amortisation has since reached $1.0B a year. The company’s adjusted operating margin, which excludes amortisation, restructuring and other items, was 40.4% in 2025, up from 38.8% in 2024, and 42.9% for nine months of 2026, against 42.0% a year earlier.¹⁴⁴ Gross margin rose from 64.8% to 67.1% over the decade C (calculated).³

The reason margins can rise is price, which costs nothing to deliver, and the mix toward smoke-free products with a 70% gross margin. The reason they may stop rising is the cost of the new business. In nine months, selling, marketing and research costs rose 4.2%, and the company says it is stepping up U.S. spending.⁴ Energy costs from the Middle East conflict are also lifting production costs, and the company says they will weigh more on the fourth quarter.⁴

Earnings quality

Net earnings to the company were $11.3B in 2025 and diluted EPS $7.26, up 61%. Adjusted EPS was $7.54, up 15% on the 2024 figure of $6.57.¹³¹⁴ The 61% is mostly the absence of a $1.49 charge for the Canadian business in 2024. For nine months of 2026, reported EPS fell 7.0% to $5.48 while adjusted EPS rose 11.8% to $6.52, or 8.4% excluding currency.⁴ The $1.04 gap is made of amortisation ($0.37), a fall in the value of equity investments in India and Sri Lanka ($0.22), a second impairment of the Canadian business ($0.33), and tax and pension items.⁴ Some of these are truly one-off. Amortisation is a real cost of the purchases the company chose to make, and restructuring charges have appeared in 2024, 2025 and 2026 alike. I use the cash flow for value, and I use the adjusted figure only for the growth rate.

Cash flow

Operating cash flow was $12.2B in 2024 and in 2025, and after capital spending and stock pay it was $10.4B in 2025. For the first nine months of 2026 it was $10.4B, against $7.5B a year earlier. Lower working capital needs of $1.9B and refunds of surplus pension assets of $0.7B explain most of the rise.⁵ The company guides to about $13.5B for the year.⁴ Cash taxes were $3.9B in 2025 against a tax charge of $2.7B in the accounts, and cash interest was $1.7B.²

Two further points about this cash, which are not in the headline. The first is Russia. Cash and equivalents held in Russia were $1.0B at the end of 2024, $2.3B at the end of 2025 and $3.1B at 30 September 2026.²⁵ The company says the Russian operations are 7% of nine-month net revenue and carry $5.6B of assets, and it lists limits on sending dividends out as one of the countermeasures Russia has introduced.⁵² Cash that cannot be paid to shareholders is not owner cash. The Russian pile rose by $1.3B in 2025 and $0.8B in nine months of 2026, part of that from a stronger ruble. The second is minority holders: dividends paid to non-controlling interests were $0.4B in 2025 and $0.4B for nine months of 2026.²⁵

Dividends paid were $8.6B in 2025, 83% of the cash left after capital spending and stock pay, and before the Russian build-up and minority dividends. At the new rate of $6.40 a share the annual bill is about $10.0B on 1,558.7M shares C (calculated).⁴⁵ Against my owner cash of $9.5B for 2026 that is 105%. I come back to this in Section VI.

Balance sheet

At 30 September 2026 the company had $47.6B of debt and $6.7B of cash, so net debt was $40.9B C (calculated).⁵ That is 2.1 times my estimate of adjusted operating income plus depreciation of $19.2B for 2026 E (estimate). The company targets close to 2.0 times by the end of this year.⁴ Credit ratings are A2, A- and A, with positive outlooks at Moody’s and S&P.⁵ US dollar notes average a 4.72% interest rate and run to 2044; euro notes average 2.22%; a $1.7B euro facility from the Swedish Match purchase at 3.09% is due in 2027; and $1.9B of commercial paper is out at 3.9%.⁵ That mix matters in two ways. The euro notes at 2.2% will be replaced when they mature at whatever rates then apply, which against the 4.7% average on the dollar notes is likely to be higher. And the euro debt moves in dollar value with the exchange rate, which the company says can change the pace of deleveraging.⁵ Net interest cost was $679M for nine months against $748M a year earlier.⁵

The balance sheet shows a deficit in stockholders’ equity of $5.9B. That is not a sign of distress. It is what happens when a company pays out and buys back more than it earns for many years: $35.5B of repurchased stock sits against it.⁵ It does mean that book value says nothing about worth, and that the company relies on lenders to carry most of its capital.

Currency and the share count

The company earns in euros, yen, rupiah, lira, rubles, pesos and many other currencies, and counts in dollars. The U.S. is about 7% of net revenue. A weaker dollar in 2026 added $0.20 to adjusted EPS in nine months, 3.4% of the base, and the full-year forecast carries $0.18.⁴ In 2025 the effect was $0.04.² The company hedges some of it, with a gross notional of $52.5B in derivatives, but hedging delays the effect and does not remove it.⁵ So the 9.9% to 11.9% of dollar growth that the company forecasts for 2026 contains about 2.4 points that a stronger dollar could take back. Excluding currency the forecast is 7.5% to 9.5%, below the 9% to 11% yearly target for 2026 to 2028; to reach that target from a $7.54 base, 2027 and 2028 must grow faster than 2026 does.⁴¹⁴

The share count is the other translation effect. Diluted shares were 2,076M in 2008, 1,549M in 2015 and 1,558M in 2025. The company bought $37.6B of stock in 2008 to 2014 and none worth mentioning since.³ That means EPS growth since 2015 came entirely from earnings, currency and tax, with no help from fewer shares. It also means the 9% to 11% EPS target is a target for earnings growth alone: the company says it excludes share repurchases.¹⁴ If the company ever resumed buying back, at $211.28 each $1B would retire about 0.3% of the shares.

The ten years in one table

VIValuation

Start with what would go wrong

Before any numbers, I ask what would most likely make this a bad investment from here, and work back from that. For a tobacco company the answer starts with the product, and I do not think the product is the likeliest problem. People have bought cigarettes for a century and will for a long while. The likeliest problems are the price and the rules. Here are the three ways it goes badly, in the order I think most likely.

1. The business does what it says and the multiple falls. At $211.28 the market pays 35 times my estimate of owner cash, and 25 times the middle of the company’s own adjusted earnings forecast for 2026 C (calculated).⁴¹ The shares have never closed higher than today, and rose 32% since the end of 2025.¹ In ten years my base has owner cash per share at $10.70, against $6.10 now. If the market then pays 22 times owner cash, a fair multiple for a steady business growing 3%, the return on $211.28 is about 5.0% a year, with all cash returned, which is about what a ten-year Treasury pays E (estimate). Nothing has to break for this to happen. I would not assume that a market now paying a staples multiple keeps paying it for a product with this tail.
2. The gap between cigarettes and smoke-free products closes. Today price rises add about 6 points a year to the company’s revenue, 9% on international cigarettes in the third quarter, with little loss of volume, and the company sells newer products with a higher margin and lighter tax. Japan is already moving its heated tobacco tax to the cigarette rate in two steps in 2026, with the next rise in April 2027.² The EU has proposed taxing heated tobacco and pouches from 2028, with four more years to adapt.² In the U.S. the company has just cut the price per pouch by about 25%, with a 2026 fourth quarter it says will bring an unusually low profit, and it faces Altria’s on! PLUS and Velo Plus.⁵¹² If cigarette pricing slows as smokers trade down, and the new products are taxed like cigarettes, growth falls from 8% to near zero, and the multiple falls with it.
3. The cash cannot be used as it is counted. Net debt is $40.9B. The dividend at $6.40 a share costs about $10.0B, which is 105% of the $9.5B of owner cash I count and about three quarters of operating cash flow.⁴⁵ Of the $6.7B of cash on the balance sheet, $3.1B is in Russia, where the company says it has $5.6B of assets and where the 10-K names nationalisation as a risk.⁵² There are no buybacks to cushion any miss. The company has said it will lower leverage and keep raising the dividend. If the cash falls short, one of those gives way.

I can show what the first does, and I do below. The second and third I can only size, by saying what each point of growth is worth and what I assume in the bear case.

What the price implies

The Treasury pays 4.90%; the dividend pays 3.0%; the owner cash yield is 2.9%. Shares of a steady company can earn more than a Treasury because their cash grows, and the company says it will grow earnings 9% to 11% a year to 2028.¹⁴ The question is whether it will grow enough, and how much of that growth the price already counts. The shares were $160.40 at the end of 2025 and rose 32% in ten months, while the middle of the earnings forecast says adjusted earnings will rise about 11%.¹⁴ So about three fifths of the share price rise is the market agreeing to pay more per dollar of earnings C (calculated).

Owner cash: what you can take out

Owner cash is what is left after the business has paid for the capital it needs, for the stock it hands to staff, for the minority holders in its subsidiaries, and after the cash it cannot move out of the country. I start from the company’s guide to operating cash flow of about $13.5B for 2026.⁴ I take out $0.7B of surplus pension assets refunded in the first nine months, which will not repeat.⁵ I deduct all of the $1.5B of capital spending it guides to, as I cannot tell how much of it is growth. I deduct stock pay of about $0.27B, since it is a cost paid in shares instead of cash. I deduct $0.52B of dividends to minority holders, which is $0.40B for nine months and a fourth quarter. And I deduct $1.0B for the cash piling up in Russia, where it rose $0.8B in nine months.⁵

So owner cash is about $9.5B against adjusted net earnings of $13.0B, 73% of it C (calculated). The gap is the Russian build-up, the minority dividends, capital spending that runs above depreciation, and cash taxes that ran above the tax charge in the accounts by $1.1B in 2025.² Before the minority dividends and Russia the figure is $11.0B, which is the number I would show if I wished to flatter the company. Counting it all, the dividend is covered 1.1 times. Counting what I can honestly say an owner can take, it is covered 0.95 times.

The dividend, and the cash behind it

This is the point the headline numbers hide. The quarterly dividend is now $1.60 a share, or $6.40 a year, a yield of 3.0%, after a rise of 8.8% in September.⁴ On 1,558.7M shares that costs about $10.0B a year.⁵ It is also the whole of the owner cash I count. The company has said it will lower net debt toward 2.0 times earnings by the end of 2026, will buy no stock this year, and will keep raising the dividend in a “progressive” policy.⁴¹⁴ All three can be done while earnings grow 9% to 11% a year. They cannot all be done if growth stalls at 3%. In my base the dividend, growing 5% a year, would be $10.5B in 2027 against owner cash of $10.3B. So even the base needs the Russian cash, or a lower dividend growth rate, or more debt. In my bear case, owner cash is flat near $9.1B and below the dividend bill, and I expect the dividend to stop growing and leverage to stop falling long before it is cut.

Reverse DCF: what the price needs

Held at my other inputs, the price needs owner cash to grow about 10.4% a year for ten years C (calculated). My base has 5.8%. Over 2016 to 2025 the cash left after capital spending and stock pay grew 4.9% a year, and 2.9% over the last five years C (calculated).³ The company’s own target is 6% to 8% organic revenue growth, 8% to 10% organic operating income growth and 9% to 11% growth in adjusted earnings per share, excluding currency, from 2026 to 2028.¹⁴ Flat growth of 10% a year for ten years, the top of the operating income target, gives a value of $204, just short of the price. At 11%, the top of the earnings target, it is $221. The price sits between them. A company that must keep the top of its range for a decade, while its main product shrinks in volume, would be doing something unusual.

My base sits above the decade’s actual cash growth of 4.9% and below the company’s target. I start it at 8% for 2027 and 2028, the bottom of the operating income target, because the record supports it: the company says organic operating income grew 9.4% a year from 2020 to 2025.¹⁴ I stop short of the earnings target because cash has grown more slowly than earnings. Adjusted earnings per share grew from $5.17 in 2020 to $7.54 in 2025, 7.8% a year, while the cash I count grew 2.9%.¹⁴³ I let growth fade to 3.5% by 2036 as cigarettes shrink.

There are two other ways to read the same price. One is the rate that equates my base cash flows to the price: 6.4% a year, which is 1.5 points above the Treasury C (calculated). The other is what a buyer pays in 2036. If my base cash flows come through and the market then pays 35 times owner cash, as it does now, the return from $211.28 is about 9.1% a year E (estimate). That is the bet in this price: a fine cash business, plus a multiple that never comes down.

The discount rate

I discount at 8%, the same rate as on my Coca-Cola and Procter & Gamble pages, so the three can be compared. The capital asset pricing model with the 4.90% ten-year Treasury and Damodaran’s 4.41% implied equity risk premium gives 7.6% on the share’s beta against the market over 119 months, 6.5% over 60 and 5.3% over 36 C (calculated).¹⁹²⁰²¹ Those are low because the betas are low: 0.62, 0.37 and 0.10. A beta of one gives 9.3%. I take 8%, a little over the highest CAPM figure. This company has $40.9B of net debt and a legal and regulatory tail that a beta measured against a market of giant growth stocks does not capture, so I do not think 8% is generous. The table shows what a higher rate does; at 8.5% the base is $136 and at 9% it is $125.

At 7.0%, close to the CAPM rate on the longest beta, the base value is $184 E (estimate). No corner of the table gets to the price.

Three cases

My base case is the company doing most of what it says, a little slower. Owner cash grows 8% in 2027 and 2028, eases to 6.5% by 2030 and to 3.5% by 2036. That fits cigarette volume down 2% to 3% a year, price of 3% to 4% on cigarettes, smoke-free volume up high single digits and steady margins. It gives owner cash of $16.7B in 2036 against $9.5B now E (estimate). The bull case has the company hit the top of its targets for three years and keep a high pace after that, and gets the Russian cash out. The bear case combines four things named in the filings: a price war in U.S. pouches, where the company says it will take about 25% less revenue per pouch; Japan and the EU taxing heated tobacco like cigarettes; higher interest as the 2.2% euro notes and the 3.09% facility due in 2027 are replaced; and a loss of the Russian business, which is 7% of revenue.⁵² In the bear, owner cash falls 4% in 2027 and then barely grows, and the value is $84. Even the bear is a business that earns a lot of cash. It is only a poor purchase at $211.28.

The company’s cash target

At its investor presentation in February, the company said it expected about $45B of operating cash flow over 2026 to 2028, against about $34B in the last three years.¹⁴ With about $13.5B guided for 2026, that implies more than $15B a year for 2027 and 2028. In my base it is $42B over the three years and in my bull $43B. I could not reconcile the company’s figure with its earnings target. A 9% to 11% growth in earnings does not by itself lift operating cash flow by 16% in a year. It may reflect lower cash taxes, working capital or exchange rates at the time. I did not use it. If I do, and the company gets there and then grows as in my base, the value is $170. If it gets there and then grows as in my bull, it is $211, about the price E (estimate). So the price needs the company to hit its most ambitious cash target and then keep the pace of my bull case.

The cash in Russia, on its own

Russia is 7% of net revenue and about 9% of cigarette and heated volume.⁵² The company has $5.6B of assets there, of which $3.1B is cash held mostly in rubles.⁵ Sanctions rules make a sale hard, and the company says any sale would probably involve a material impairment.⁵ Russian courts also forced the company’s Dutch holding company out of its distributor TKM in 2024, though the company still reports a 23% interest.² I do not count the cash or the build-up. If I counted the cash as released in one go, it would add $1.99 a share, and I do count it in the bull case only. Everything beyond that is a bet on a conflict.

What I can’t judge

Some inputs can’t be known, and I would rather say so. I don’t know how the FDA will treat IQOS ILUMA, which has waited since March 2024. I don’t know how much of the third-quarter pricing, which was boosted by a one-time change in distribution terms, will carry into next year. I don’t know what the EU or Japan will do with tax after 2028. I don’t know how the courts will treat tobacco claims after Canada’s settlement; I note only that the company has won every case that reached a final judgment, and that its 10-Q lists seven healthcare cost cases still pending, in Brazil, Korea and Nigeria.⁵ I don’t know how far governments will go in restricting a product that harms many of its users. I don’t know how much of the $1.5B of capital spending is upkeep; I show a range of $8.6B to $10.7B for owner cash. And I can’t know what multiple the market will pay in 2036. That last input matters more than the rest together, which is why I show the returns at several multiples and not one.

Multiply it out

My base needs several things at once. Cigarette volume falling no faster than 3% a year, with price still sticking: I would give that 70%. Smoke-free volume growing at high single digits for years: 65%. Tax and product rules not closing the gap between cigarettes and smoke-free products in the major markets: 70%. U.S. pouch profit recovering after the price cut: 65%. No loss of the Russian business or its cash beyond what I have already left out: 85%. Multiplied, that is about 18% E (estimate). They overlap, since good volume helps the rest, so the true figure is higher, perhaps a quarter. But the price needs more than my base. It needs my base and a multiple near today’s in 2036. If I give that a one-in-five chance, the joint odds are about 4% before overlap E (estimate). The argument for this price is not simple. It needs many things to go right at once.

Quality and price are two questions

How good is the business? As a cash machine, very good. It turns 30 cents of each revenue dollar into operating cash, needs about $1.5B a year of capital, has a lead in the products regulators allow and has raised its declared dividend every year since 2009 in the figures it files.³¹⁴ As a product, it is not one I can describe as a good thing for the world, and its owners carry a legal and ethical tail that a food company’s do not. How good is the price? Poor, on my numbers. At $211.28 the price is above my bull case. A good business can be a poor purchase at the wrong price, and on this evidence that is what this looks like.

It helps to compare it with the next best use of the same dollar. A ten-year Treasury pays 4.90% with no risk to the dollars promised.¹⁹ Philip Morris returns about 6.4% a year on my base, 1.5 points more, with all the risk of a share, a tobacco company’s tail and a Russian exposure. On this site, Coca-Cola returns 6.8% on its page’s base case and Procter & Gamble 6.7%, both against the same 8%. Philip Morris is the lowest of the three, though only by 0.3 to 0.4 of a point, and it has the highest dividend yield and the most severe outside risks. Of the three businesses compared here, it earns the most cash per dollar of sales and, at this price, offers the lowest return for the risks it carries.

The margin of safety

My margin-of-safety price is $104, 30% below my base value. At $104 my bear case returns about 6.7% a year, below the 8% I require but well above a Treasury, and the base returns about 10.3% C (calculated). A 30% cushion is what I use for a business with a long history of cash and large outside risks. The price is 103% above it. The stock last closed at or below $104 on 10 July 2024, and last closed at or below my base value, $149, on 8 December 2025 C (calculated).¹ Today’s close is the highest in ten years of data.¹

VIIThe case for the price

What most people miss

First, governments take more from each pack than the company keeps. In 2025 customers paid $53.2B of excise and sales taxes on top of $40.6B of net revenue, so the company kept 43 cents of each dollar C (calculated).³² Second, the cash is not all there to be used. Cash held in Russia went from $1.0B to $2.3B to $3.1B in the 21 months to September 2026, out of $6.7B in total.²⁵ Third, smoke-free is the higher-margin side: a 70.0% gross margin against 68.0% for cigarettes outside the U.S. The weak spot is the U.S., where the margin is 63.4% and profit fell 41% in nine months.⁵⁴

The bull case

In plain words: Philip Morris leads the one part of tobacco that is growing. More than a billion people still smoke, and some will switch to something less harmful if it is allowed and priced right.² The company has a ten-year lead in heated tobacco, the only authorised risk claim for a U.S. nicotine pouch, and cigarette pricing power that pays for it. It targets 6% to 8% organic revenue growth, 8% to 10% organic operating income growth and 9% to 11% growth in adjusted EPS a year from 2026 to 2028, with growing shipments and about $45B of operating cash flow.¹⁴ In the third quarter, smoke-free in-market sales grew at a high single digit, and the group chief executive called it an excellent quarter on track for a sixth year of volume growth.⁴ I found no written case about this company from the funds I checked, and no named research I could open, so I attribute none. Fundsmith, Lone Pine and Gardner Russo cut or exited in the first half of 2026; those are holdings, not views.¹⁵¹⁶¹⁷

Against reality

Much of this is true today: adjusted operating margin is 42.9% against 42.0% a year earlier, and the FDA granted ZYN its risk claim in June.⁴⁵ My bull gives the company more: owner cash growth of 11% in 2027 easing to 5%, plus the Russian cash, worth $192 E (estimate). If the company does all that, it is larger and more profitable in 2036, and still short of $211.28. The price needs about 10.4% a year at my other inputs, against 5.8% in my base and 4.9% in the last decade C (calculated). Two paths reach it: a flat 10.5% for ten years, between the tops of the operating income and earnings targets, or the company meeting its whole $45B cash target and then growing at my bull pace, which gives about $211. So the case at this price rests on the cash target and the multiple. The shares rose 32% this year while adjusted EPS is guided up about 11%.¹⁴ The third quarter held a warning: 8.9% pricing on international cigarettes included a distribution change that will not repeat, and the U.S. fourth quarter will be weak.⁴⁵

What a 10x would take. Ten times $211.28 is $2,113 a share, about $3.3 trillion of market value C (calculated). At 25 times adjusted earnings that needs $132B of net income, 10 times the $13.0B I assume for 2026. At a 30% net margin it needs about $445B of revenue against about $44B now E (estimate), or 26% a year for ten years with no change in the multiple. The company’s plan is 6% to 8%. The shares rose 2.2 times in ten years.¹ From $330B a tenfold rise is close to impossible, and I would not build a case on it.

Where I come down

The Russian cash and the dividend moved me: about $1B a year of the cash is stuck, and the dividend costs as much as what is left. The bull case did not move me on value, since even my bull falls short of the price. What would raise my values most is the company meeting its cash target while U.S. pouch profit recovers and the FDA authorises IQOS ILUMA, which would show growth from new customers and not only from price rises on cigarettes.

VIIIRisks, and what would change my view

The three ways this goes badly wrong are at the start of Valuation. These are the rest, and what owning a tobacco company adds to them.

• What owning it means. The product causes serious disease, and the company says it aims to stop selling cigarettes. An owner has to expect that some institutions will not own it, that public opinion and law can move against it, and that some of what it does is a matter of values and not only of returns. I have valued the cash and not argued the ethics.
• Litigation. More than 600 cases have been filed since 1995 and every one that reached a final judgment ended in the company’s favour. Seven healthcare cost cases are pending, in Brazil, Korea and Nigeria.⁵ In Canada, a settlement of CAD 32.5B was shared across three companies, and the investment in the company’s Canadian subsidiary is down to $51M after $3.1B of impairments.⁵² The amounts in pending cases are not expected to be material, but the Canadian outcome shows the scale a settlement can reach.
• FDA and other regulators. The FDA’s orders for IQOS and ZYN are not approvals, and it can review them, particularly if youth use rises.⁵ The company’s two U.S. pouch plants, in Kentucky and Colorado, supply substantially all U.S. capacity.⁵ Authorisation of ILUMA remains pending. The EU is revising its tobacco rules in 2026 and has proposed a new excise law.²
• Currency. The dollar’s direction adds about 2.4 points to the 2026 adjusted EPS forecast and added about 0.6 points in 2025.⁴² A stronger dollar would take back the gain, and hedging only delays the effect.
• Leverage and refinancing. Net debt of $40.9B is about 2.1 times earnings before interest, tax, depreciation and amortisation. Euro notes at 2.2% and a 3.09% facility due in 2027 will be replaced at higher rates.⁵
• Russia and Ukraine. Russian operations are 7% of net revenue with $3.1B of cash. Ukraine is about 1% of revenue, with the Kharkiv plant shut.⁵
• Management bench. A new finance chief from 1 August 2026, in the middle of a deleveraging and a weak U.S. quarter.⁷ A concentration of buyers: one customer in each of two segments accounted for 10% to 12% of net revenue in 2025.²
• Wellness. The company is restructuring the unit in the fourth quarter and says it may impair $337M of goodwill.⁵

What would raise my base value: the 2027 forecast in February showing adjusted EPS growth of 9% or more excluding currency, volume and mix positive alongside price, a recovery in U.S. profit and an FDA decision on ILUMA. What would lower it: volume turning negative, price rises slowing before volume recovers, parity in the tax on heated tobacco, or a dividend raised faster than the cash behind it.⁴⁵