This Monster Dividend Growth Stock Is Up 86% in the Last Year

The tobacco sector had been left for dead by investors. Volume declines drove earnings ratios lower, while mandates for investing with an environmental, social, and governance (ESG) mindset kept many investors away from the stocks. No longer.

Now, the category is making a comeback. Not because of cigarettes but due to the rising growth of new-generation nicotine products such as nicotine pouches. The clear leader in this space is Philip Morris International (NYSE: PM), which has 42% of net revenue coming from this fast-growing category. Unsurprisingly, the stock is up 86% in the last 12 months, putting up some monster returns for shareholders.

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Here's how its dividend growth can continue into the future.

Massive growth in new nicotine categories

There are three major nicotine categories that are replacing traditional cigarettes: electronic vaping, heat-not-burn tobacco, and nicotine pouches. Philip Morris International is a leader in two of these categories.

Largest of its brands is Iqos, a heat-not-burn device that holds 77% share of its category around the world. These devices are popular in Europe and Japan, and are launching soon in the United States. Volume from Iqos made up close to 20% of the company's total volume when converting all of its brand sales to equivalent cigarette pack sales.

Zyn -- the company's nicotine pouch brand -- is smaller but growing much faster than Iqos as nicotine pouches gain adoption around the world. Volume grew 53% year over year in the United States and 182% internationally when excluding its home Nordic markets. These are impressive growth figures that show why nicotine pouches can be a fine profit driver for Philip Morris for years to come.

Lastly, there is the small vaping category with VeeV devices. These are a tiny part of the business today, but the brand is putting up 100% year-over-year volume growth at the moment. Perhaps within the next 10 years, VeeV can be a meaningful part of the growth equation for Philip Morris International, but it is very small today.

Stable volume, growing cash flows from cigarettes

Unlike other tobacco makers, Philip Morris International is actually seeing fairly stable volume from its legacy cigarette business due to its exposure to countries with fast-growing populations. In the first quarter, volume was up 1.1% year over year. Pricing power has led the combustibles segment to grow gross profit 6.6% year over year in 2024 and 5.3% year over year in Q1 of 2025, which is a big driver for the company's earnings growth over this period.

Operating income hit a record $13.9 billion over the past 12 months mostly due to the stability in volumes and pricing power of the cigarette unit. Free cash flow has not inflected higher like operating income, but that is because of the manufacturing investments for its alternative nicotine brands. As these facilities get finished, free cash flow should start to converge with operating income.

Over the long term, more and more of the Philip Morris International business will come from non-cigarette revenues. But there is still a ton of cash flow that will be generated from this segment over the next decade.

PM Dividend Yield data by YCharts.

The formula to monster dividend growth

With its strong returns in the past year, Philip Morris stock now trades at a dividend yield of just 3.1%. In late 2023 and 2020, you could have bought the stock at close to a 6% dividend yield.

Even with this reduced dividend income, investors who buy today are getting a great dividend growth stock that they can hold for many years. The stock had a dividend per share of $5.35 over the last 12 months. Free cash flow per share was $6.55, much higher than its dividend payout even with the depressed cash flow with the manufacturing build-out. If free cash flow per share does not grow, the company has the cash-generating capabilities to grow its dividend per share by 5% a year for four straight years before reaching current levels.

Free cash flow per share will most likely be much higher in four years -- even higher 10 years from now. Philip Morris International has tremendous momentum with its new nicotine brands and stable cash flows coming from the cigarette business. As free cash flow per share climbs higher, the company will be able to consistently grow its dividend-per-share payout, which will increase your dividend income as a shareholder. This makes the stock an easy buy-and-hold for investors looking for growing dividend income in the years to come.

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