Based on the article below, Philip Morris has both risks and growth opportunities. Risks are related to upcoming EU tobacco regulation changes, which may affect new generation products (NGP) either positively (legalization of nicotine pouches) or negatively (flavor bans, tax increases).
Sales volumes of tobacco products may decline starting from 2025, but on the positive side, the IQOS product may have an easier year in 2025 as the effects of the flavor ban stabilize. Growth in ZYN product pricing can significantly increase the company’s profit and accelerate EPS growth.
If I understood correctly, a quite massive reduction in nicotine is being proposed for cigarettes. The proposal is 0.7 milligrams per gram of tobacco, whereas currently in Marlboro the figure is around 10-12.
The regulation thus affects traditional combustible tobacco. HTPs, vapes, and pouches are outside of this.
“Today’s proposal envisions a future where it would be less likely for young people to use cigarettes and more individuals who currently smoke could quit or switch to less harmful products. This action, if finalized, could save many lives and dramatically reduce the burden of severe illness and disability, while also saving huge amounts of money. I hope we can all agree that significantly reducing the leading cause of preventable death and disease in the U.S. is an admirable goal we should all work toward,” FDA Commissioner Dr. Robert Califf said in the statement.
Perhaps some kind of support is also being given to new generation products by the FDA here.
In my opinion, PMI is in a pretty good position if this goes through as is. It increasingly accelerates switching from competitors’ tobacco products to IQOS and Zyn.
Philip Morris reported a strong year, driven by smoke-free products IQOS and ZYN, as well as traditional cigarettes. CEO Jacek Olczak emphasized the significance of FDA approval for ZYN pouches and hoped other countries would follow the U.S. example in tobacco harm reduction.
The growth of PMI’s less-noticed e-cigarette brand VEEV in recent years. I myself used to shrug it off, as it was such a marginal part of the entire company. However, in 2024, VEEV reached a total of one million users, and the product is now a top 3 product in its category in 13 European countries (including Finland).
British American Tobacco published its 2024 figures this week, which were received with disappointment by the markets, and the share price fell by approximately 8% on the day of the announcement.
Summary
Revenue down 5.2%, driven by the sale of our businesses in Russia and Belarus in September 2023 and translational FX headwinds
Organic revenue up 1.3% (at constant rates), driven by New Categories revenue up 8.9%
Total combustibles organic revenue increased 0.1% (at constant rates), as organic price/mix of +5.3% was offset by 5.2% lower volume
Reported profit from operations of £2,736m (2023: loss of £15,751m) with 2024 including a provision of £6.2 billion in respect of the proposed settlement in Canada, while 2023 was negatively impacted by one-off impairment charges largely in the U.S.
Adjusted organic profit from operations up 1.4% (at constant rates), driven by AME and APMEA
New Categories contribution increased by £251 million on an adjusted organic, constant FX basis, with category contribution margin now at 7.1%, an increase of 7.1 ppts on 2023
Reported diluted EPS at 136.0p; adjusted organic diluted EPS up 3.6% (at constant rates)
Free cash flow of £7,901 million; adjusted net debt / adjusted EBITDA down 0.13x to 2.44x (down 0.3x at constant rates)
Dividend growth of 2.0% to 240.24p - with £900 million share buy-back planned in 2025
In its article, GuruFocus.com summarized the pros and cons of the earnings release and the key points from the CEO’s interview.
Positive Points
British American Tobacco PLC reported a 1.3% growth in group revenue and an 8.9% increase in new category revenue, indicating strong performance in emerging product lines.
The company achieved a 3.6% increase in diluted EPS, reflecting effective cost management and operational efficiency.
Smokeless products now account for 17.5% of group revenue, with a significant increase in consumer base, showcasing successful diversification efforts.
The company has initiated a sustainable share buyback program and announced a 2% growth in dividends, demonstrating commitment to shareholder returns.
British American Tobacco PLC has made significant progress in reducing leverage to 2.4 times, enhancing financial flexibility and resilience.
Negative Points
The company faced challenges in the US market, with a 3.4% decline in revenue due to macroeconomic pressures and illicit Vapour products.
Vapour revenue fell by 2.5%, impacted by weak enforcement against illicit single-use vapes in the US and Canada.
The company anticipates significant headwinds in Bangladesh and Australia, which are expected to impact 2025 group revenue growth by 1% and APFO growth by close to 2%.
In Australia, new tobacco regulations and excise increases are expected to further accelerate legal industry volume decline.
The company is dealing with a GBP 6.2 billion provision for Canada’s CCAA proposed plan, reflecting ongoing legal and regulatory challenges.
Q & A Highlights
Q: Could you clarify the factors that will result in the US growing, despite a challenging macro environment and illicit vape enforcement? A: Tadeu Marroco, CEO, explained that the US is expected to return to growth due to a lower base in 2024, market share gains, and investments in trade coverage and digital capabilities. The success of Velo-plus in new categories will also support growth. However, challenges in the legal Vapour market remain a headwind.
Q: Can you provide insights into Velo-plus’s market share and distribution strategy in the US? A: Tadeu Marroco stated that Velo-plus accounts for about 7% of the total volume share, with a strong presence in New York. The product’s higher moisture content resonates with various consumer types. Currently, Velo-plus is available in 75,000 outlets, with plans to expand to 110,000 by April.
Q: Why is Bangladesh’s profit impact different from Pakistan’s past excise tax increase? A: Tadeu Marroco explained that Bangladesh’s ad-hoc excise increase, coupled with VAT and duty hikes on over 100 products, has significantly affected affordability. This differs from Pakistan, where the government took actions to mitigate illegal market growth after initial excise shocks.
Q: What gives you confidence in achieving the midterm guidance by 2026, and how does US performance factor into this? A: Tadeu Marroco highlighted investments in innovation, such as glo Hilo and Velo-plus, and a more supportive macroeconomic environment in the US. The expectation of improved enforcement against illicit Vapour products also contributes to confidence in achieving the guidance.
Q: What are your plans for the ITC hotel stake, and how does it fit into your capital allocation priorities? A: Tadeu Marroco stated that BAT does not intend to be a long-term shareholder in the hotel chain. The company plans to divest the stake at the right moment to maximize shareholder value and use the proceeds to achieve leverage targets by 2026.
Q: Can you provide details on the improvement in new category profit contribution? A: Soraya Benchikh, CFO, mentioned that the improvement was driven by revenue growth management, cost optimization, and a focus on high-profit pools. The company achieved a 500 basis point increase in gross margin for new categories, with significant contributions from tobacco heating products and modern oral.
Q: What are the implications of illicit Vapour growth outside the US, and how does it affect your investment strategy? A: Tadeu Marroco noted that the biggest challenges are in the US and Canada, with some markets like France and New Zealand managing Vapour well. Despite challenges, Vapour remains a significant opportunity for converting smokers, and BAT continues to advocate for proper regulation and enforcement.
Q: Could you explain the new tobacco regulations in Australia and their impact? A: Tadeu Marroco described the regulations as the most significant change since plain packaging in 2012, including new health warnings and pack format changes. These regulations, combined with ad-hoc excise increases, have contributed to the rise of the illegal market in Australia.
Although the year had its challenges and future regulation will weaken growth in the coming year, I don’t think the result is a disaster; expectations were just a bit higher. Growth, especially in smoke-free products, continues to be strong. The 8% share price drop was quite significant, but the share price had already strengthened by approximately 40% over the last 12 months, so letting off some extra steam is probably not a bad thing, especially if one wants to buy more.
That £6.2 billion provision is related to the settlement of the Canadian tobacco lawsuit, where the largest tobacco companies Philip Morris, Japan Imperial Tobacco, and British American Tobacco would pay compensation to smokers.
In British American Tobacco’s (BTI) Q4/24 and full-year earnings report, a tremendous growth in nicotine pouches and snus caught the eye, with growth in hundreds of percent (as a single product area), and it is only expected to grow in the coming years, and this is a business area where BTI is also investing in the near future.
If you’re after a large dividend, it’s an excellent target to invest in for a safe, large dividend, if you don’t mind investing in a tobacco company. (I also have a small stake for the large dividend )
Traditionally, tobacco companies are good dividend payers, but ethics often limit investing in tobacco, and funds generally don’t invest in them at all.
All tobacco companies are facing a major upheaval because political decisions will, in the longer term, completely ban combustible tobacco. Snus and nicotine pouches will replace a large part of combustible tobacco, and there are also other products like vapes and other vaporizers that replace traditional combustible tobacco.
Not a bad trend in the industry as a whole; smoking kills, that’s just a fact and there’s no getting around it. Replacing the nicotine dose in some way other than by smoking tobacco is good; any change away from combustible smoking is good for health and for fellow human beings.
Philip Morris reported a strong first quarter where revenue, operating profit, and earnings per share grew by double digits. The company raised its full-year earnings forecast and reaffirmed its outlook for “currency-neutral” growth despite global uncertainty. The share of the smoke-free business grew significantly, and additionally, margins clearly exceeded those of traditional products.
ZYN nicotine pouches grew strongly, especially in the United States, and production capacity is being increased with a new factory in Colorado. IQOS products performed well in Europe and Japan, and their launch in the United States has also begun.
The traditional cigarette business maintained growth through pricing and stable volumes. The company continues its multi-product category strategy and aims to reduce its debt ratio and increase dividends.
In October, I linked to a news story that talked about the new Velo Plus nicotine pouch, where the nicotine is of synthetic origin. It also seems to be selling well. I’ll be following with interest how the market is divided between Zyn and Velo.
"BTI’s flagship pouch brand, Velo, has been gaining momentum, especially with the introduction of Velo Plus, a new product line offering larger, softer pouches, higher nicotine strengths, and lower price points. Velo’s performance has been remarkable—its 4-week rolling volume share in the U.S. reached 7.9% in March 2025, reflecting 185% year-over-year growth, while Velo Plus alone captured a 5.4% share just 12 weeks after launch and now comprises approximately 70% of all Velo sales.
What’s driving this surge? Velo Plus delivers a better overall user experience compared to incumbent leader Zyn, with a more satisfying mouth feel, superior nicotine release, and compelling value—$2.99 for 20 pouches versus Zyn’s $5.59 for 15. These attributes resonate with cost-conscious consumers seeking a discreet and customizable nicotine experience, which has become increasingly desirable amid rising wellness trends. While Zyn remains dominant with a 50%+ share, particularly in flavor-restricted markets like Massachusetts, BTI’s rapid innovation and competitive pricing put it in a strong position to chip away at that lead. Importantly, BTI’s investment appeal goes beyond product growth. The stock trades at just 9x forward earnings and offers a well-covered 7% dividend yield, presenting a stark valuation contrast to Philip Morris, which trades at nearly 22x earnings. If Velo’s growth continues, BTI could experience a meaningful rerating."
BAT again sold a small slice of Indian ITC and is increasing its share buyback program by 200 million pounds from what was previously planned.
"BAT said it would increase its 2025 1.1 billion pounds ($1.49 billion) share buyback programme by 200 million pounds as a result of the deal, which is not expected to have any other impact on its annual outlook."
From the UK you get a share, from the US an ADR.
From the US, of course, you get better liquidity for the share, but I’m not sure if it’s worth it. I’ve personally ended up buying from the German stock exchange with the BMT ticker, thus saving on currency exchange fees. Of course, the spread might be larger than on the UK or USA stock exchange.
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