Billionaire Stan Druckenmiller called the Nvidia bull run over the last few years. The retired hedge fund manager made a big bet on artificial intelligence (AI), and it paid off handsomely for his portfolio. Now, he has purchased shares of a company in an entirely different sector: Philip Morris International (NYSE: PM). The largest tobacco company by market cap in the world now makes up over 3% of Druckenmiller’s portfolio, and that excludes a call option position he has taken to further bet on the company’s success.

What does Druckenmiller see in Philip Morris International stock? I think it is strong revenue growth, dividend earnings, and a durable but misunderstood business. Here’s why the billionaire has just added this magnificent stock to his portfolio.

Big waves in healthier nicotine products

Even though Philip Morris International is known as a storied tobacco brand, it has pivoted its business away from just cigarettes over the last 15 years after splitting off from Philip Morris USA (now known as Altria Group). Last quarter, smoke-free products made up 38% of total company revenue, or around $3.76 billion. That is incredible growth from a standing start not that long ago.

Its two most successful products are IQOS heat-not-burn devices and Zyn nicotine pouches. IQOS is a healthier way to mimic cigarette smoking, similar to electronic vapor devices, and is wildly popular in Europe and Japan. Shipment volumes for IQOS and other heat-not-burn devices have grown 13.9% year-over-year through the first nine months of 2024 to 104 billion units. It is still much smaller than Philip Morris’s cigarette unit sales, which totaled 464 billion units over the same period, but it has gained ground quickly.

Zyn nicotine pouches are a smaller business compared to IQOS, but the company has experienced faster growth. Shipment volumes in the United States grew to 149 million cans last quarter compared to 105 million for the same period in 2023. The brand is growing so fast that Philip Morris has run into supply shortages. Supply constraints have started to ease, but they are still holding back Zyn’s true growth potential. This should be realized in 2025 and 2026 and provide a further tailwind for Philip Morris’s smoke-free business.

Pricing power and population tailwinds

The legacy cigarette business is nothing to snuff at for Philip Morris. Unlike other cigarette makers with exposure to countries with stagnating or declining populations, Philip Morris International operates in countries with growing populations, which is helping buoy its shipment volumes even as the % of cigarette smokers declines around the world. Year to date (YTD) in 2024, cigarette volumes have been relatively flat at 0.5% growth, which is much better than its tobacco peers.

Over the long run, Philip Morris’s cigarette volume should start to decline. However, it can still grow sales through consistent price increases, which do not impact shipment volumes much. In 2022, the company raised combustibles pricing by an average of 5%. In 2023, it raised them by 8.9%. So far in 2024, it has raised them by an average of 8.8%. This has led to strong revenue growth and profitability for the combustibles business. Combined with this, the smoke-free business and management is expecting close to 10% revenue growth this year.

PM PE Ratio (Forward) data by YCharts

Should you buy the stock?

After Druckenmiller’s purchase of Philip Morris International, the stock has gone up quite a bit. Over the last six months, the total return for the stock is 37%, which is outperforming the market by a significant margin.

This doesn’t necessarily mean you have missed the boat, though. Even after this rise, Philip Morris International’s forward price-to-earnings ratio (P/E) is just 20, which is well below the S&P 500 average. Its dividend yields around 4%, providing shareholders with healthy dividend income each year. Revenue and earnings per share (EPS) have a clear path to growth over the long haul as the company keeps raising prices on cigarettes and adding customers to its smoke-free business.

If revenue keeps growing at 10% annually with strong profit margins, I think Philip Morris International stock has a lot of room to run. Add in the dividend income, and it is no surprise why Stan Druckenmiller added the stock to his portfolio earlier this year.

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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Philip Morris International. The Motley Fool has a disclosure policy.