Is This the Best Stock to Beat Inflation?

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Inflation is the worst it’s been in 40 years. U.S. Treasury Secretary Janet Yellen admits she no longer thinks it’s transitory, “We’ll have to put up with high inflation for a while longer,” she said in a recent interview with CNBC.

That means investors need to adjust their thinking too and consider stocks that can be a hedge against this rampant inflation. Global tobacco giant Philip Morris International (PM 0.43%) could be one of the best stocks in that category, and one you should seriously consider for your portfolio.

Image source: Getty Images.

The pass along effect

Philip Morris became responsible for selling Marlboro and other tobacco brands in international markets following its split from Altria in 2008. The European Union is its largest market, responsible for 26% of its combined traditional cigarette and heated tobacco unit (HTU) shipments, with another 22% coming from South and Southeast Asia.

Although HTUs are Philip Morris’ fastest-growing category with shipments surging 14.2% in the first quarter compared to a 1.9% gain in traditional combustible cigarettes, they’re starting from a much smaller base. HTUs only represent about 14% of total shipments. That’s significant, but regular cigarettes are still where the company generates most of its profits.

And that’s why Philip Morris (and other tobacco stocks) are good companies to own when times get tough. Because of the addictive nature of nicotine, smokers are willing to pay for cigarettes, even as prices rise.

Cigarette companies are able to raise their prices several times a year to adjust for inflation and taxes without any substantial loss in customers.

Image source: Getty Images.

Still a massive growth opportunity

Cigarette smoking, of course, is in a secular decline and has been for decades, but there are still an estimated 1.1 billion smokers worldwide. Europe has 112 million of them, while China alone accounts for one-in-three of the world’s smoking population. And Philip Morris has a presence everywhere.

Excluding China, where cigarette sales happen through a government-backed operation that Philip Morris partnered with in 2005, the tobacco giant owns a 28% share of the non-U.S. cigarette market.

Sales in 2021 topped $82.2 billion, generating profits of more than $9.1 billion — increases of 8% and 13%, respectively. The Marlboro brand alone accounted for 38% of the company’s total shipment volume.

It’s currently blocked from selling its heat-not-burn IQOS product in the U.S. through Altria due to a patent dispute with British American Tobacco. But as one of the few offerings with “modified risk tobacco products” status from the U.S. Food & Drug Administration, the company is looking at ways of getting around the import ban.

Image source: Philip Morris International.

The future of smoking

Yet because smoking is in decline, Philip Morris sees its reduced-risk products as the future. CEO Jacek Olczak has called for cigarettes to be banned by 2030, but the company still has to convince critics it’s serious about a smoke-free operation.

The IQOS heated tobacco device is the leading cigarette alternative globally. It’s sold in 71 markets where it has a 3.5% share of the total market (including traditional cigarettes). That’s obviously small in comparison to the company’s 24% share for cigarettes, but there’s considerable runway for growth. In the first quarter, it added one million new IQOS users.

Hedge against inflation

Cigarette demand is what economists call “inelastic,” meaning smokers aren’t price-sensitive. That bodes well for the tobacco companies since inflation is now a worldwide phenomenon with Europe recording its sixth consecutive month of record inflation as April’s rate of 7.5% surpassed March’s 7.4% (the U.S. Consumer Price Index rose 8.5% in March by comparison). 

Philip Morris trades at 17 times trailing earnings and 16 times forward estimates, a discount to the broad market. With the prospect for solid sales and profit growth — plus a generous 5.1% dividend yield — it may be the best stock to beat inflation.