In what has to be one of the strangest headlines over the years, Philip Morris International (NYSE:PM) announced that they’re getting into the life-insurance business. Yes, we’re talking about that Philip Morris, the famous (or infamous) distributor of tobacco products. Even more strange, PM stock is taking the news quite well.
Shares closed up slightly on the Tuesday session, and didn’t really move much during extended hours. Of course, that dynamic runs counter to our intuition. According to the Centers for Disease Control and Prevention, cigarette smoking is the leading cause of preventable death. It’s almost as if management is deliberately throwing Philip Morris stock into a fierce headwind.
Even more curious, PM is offering discounts to buyers who either transition to smoking alternatives like vaporizers or quit altogether. Here’s how this will work. For those who switch to e-cigarettes, they’ll receive a 2.5% discount on insurance premiums. Anyone moving to a Philip Morris-branded heat-not-burn product — specifically iQOS — will get a 25% discount.
Finally, buyers who quit smoking for at least a year will enjoy half off on premiums. On the surface, this is an awfully risky environment for PM stock. I’m sure I’m not the only investor who thought, what the heck is management smoking?
At the same time, it can also be a genius move that may stabilize Philip Morris stock.
Cynicism Drives PM Stock
Just based on headlines alone, you would imagine this is the equivalent of McDonald’s (NYSE:MCD) buying out Weight Watchers (NASDAQ:WW). But dive a little deeper into the details, and you get the true sense of where management is headed: they just want the insured to transition to Philip Morris-branded e-cigarettes.
And of course, that’s a great business strategy that should boost PM stock. A major fundamental overhang working against tobacco firms is shifting consumer habits. Today, it’s no longer fashionable to smoke as it once was. Anti-tobacco advocates have done wonders exposing the seedy side of the business, ranging from health concerns to predatory practices.
Plus, the cool kids are not smoking. Instead, they’re vaping, and it’s not hard to see why. For example, take a quick peek at some of the popular e-juice products. You’ll find a dazzling array of fruit and organic blends, and candy-inspired flavors. I don’t vape yet I’m tempted to!
However, it’s not just the broader shift toward e-cigarettes that benefits Philip Morris stock. We’re talking big tobacco, so naturally, they’ll amp up the cynicism factor. Management realizes quite well that no matter how much you want to quit smoking, you just won’t do it. Therefore, they don’t really have to worry about giving up a 50% discount.
For non-smokers, the path to abstinence appears easy and straightforward. Put on a nicotine patch, or chew some nicotine gum, and eventually, you’re on your way to freedom. Yet recent scientific studies indicate that tobacco is much more addictive than experts initially thought.
For instance, the CDC reports that average smokers take eight to 11 attempts to quit. The American Cancer Society has similar numbers, between eight to 10. But the bottom line? PM knows you likely won’t quit.
Philip Morris Stock to Benefit From Easy Competition
While today’s focus is on the company’s new business venture, what underlines PM stock, again, is the cynicism. This is management’s attempt to adapt to changing market conditions and funnel more revenues into their pockets.
Better yet, this is a very realistic strategy. Although the e-cigarette revolution has historically hurt big tobacco, this age-old industry has something the upstart sector does not: massive resources. After paying down some debt, PM is sitting on more than $3 billion in cash.
On the other hand, the e-cigarette industry is comprised of many small Chinese companies competing for consumer dollars. Although it’s a flashy (literally, in some cases) segment, it’s also extremely cutthroat. Plus, geopolitical tensions such as the one we’re suffering through right now can present challenges to typical e-cigarette makers.
PM, though, has the resources to ride this and other waves. Admittedly, their products haven’t captured vape users’ attention like the Chinese companies have. But they have ample funds to invest in research and development. Worse comes to worst, management can buy out their vaping competitors, which supports the cause for Philip Morris stock.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
