Caledonia Investments views Philip Morris as a high-quality business with significant moats and pricing power, built to compound value for the long term. The investment in Philip Morris, valued at £66.1m, has been held since 2016 and has delivered a return of 5.5%. The firm emphasizes its commitment to investing in companies that exhibit durable competitive advantages and strong market positions, which aligns with their long-term investment philosophy.

Philip Morris International Inc. (PM) has shown resilience despite a pullback in shares during the quarter. The company's smoke-free offerings, particularly IQOS and ZYN, are gaining traction, converting smokers and benefiting from increased capacity. The margins on these smoke-free products are higher, and the stable combustibles business, combined with robust smoke-free growth, is expected to generate significant and sustainable free cash flow over the long term. This positions PM favorably for continued value creation.

Philip Morris International Inc. (PM) shares outperformed due to strong execution and an improving outlook. The primary driver remains the success of its smoke-free products, with sustained momentum in IQOS and ZYN, supported by robust pricing in the combustibles portfolio. We believe the combination of smoke-free growth potential and a resilient combustibles business will generate significant and sustainable free cash flow in the years ahead.

Philip Morris continues to ride the waves of a significant product cycle in smoke-free products with shares up 54% year-to-date. The company is performing exceptionally well, and its strong performance has contributed to the portfolio's success. The investment thesis is supported by the ongoing transition to smoke-free alternatives, which positions Philip Morris favorably in the evolving market landscape.

Andvari made its first investments in tobacco companies, including Philip Morris International, due to their low valuations and high dividend yields. Despite a declining population of cigarette smokers in developed countries, Philip Morris has maintained or slowly increased revenues and profits through regular price increases. The company has also invested in reduced risk products, which are gaining traction among smokers. The nicotine pouch category, particularly the ZYN brand owned by Philip Morris, is experiencing rapid growth, indicating a positive shift in consumer preferences. With 1.1 billion nicotine users globally, there is significant potential for market share growth in reduced risk products, which could benefit shareholders.

Shares of Philip Morris tacked on an additional 33% in the first quarter after returning 34% last year. The company reported a 53% increase in US ZYN shipments as production capacity increased, fueling a 250 basis point improvement in operating margins and illustrating the positive mix shift to smoke-free products. While we have reduced the position as shares have eliminated their discount to the market over the past year, PM remains our largest investment, with momentum accelerating in its business. Simply put, it’s difficult to find another company better positioned for the current economic environment.

Philip Morris International (PM) was the best performing stock this quarter rising 33%. Our conviction in the shift to smoke-free tobacco alternatives, and PM’s leadership in this area, have started to pay off as the market has come to appreciate what we have projected for years. This speaks to the stability and predictability of the companies in which we invest and is a key reason why our outperformance this quarter was not only driven by sector positioning but also included strong contributions from positive stock selection.

Philip Morris International delivered another strong earnings report and a solid outlook for 2025. However, the stock has repriced materially: we were initially buying at a low-teens earnings multiple and almost 6% dividend yield. It now trades on a low 20s earnings multiple and a 3.6% dividend yield. Whilst this is a reasonable valuation for a very resilient business with a double-digit earnings growth profile, we have significantly reduced the position.

Our position in Philip Morris Int’l (PM) was called away in the quarter. Shares of Philip Morris posted outsized returns over the past year, with a total return of 34% in 2024 and approximately 25% thus far in 2025. While we continue to view the underlying fundamentals of the company favorably, the P/E has increased to 21x earnings, at the higher end of its historical P/E multiple range.

Reduced-risk products (RRPs) have been a key driver in positive nicotine consumption for Philip Morris. Nicotine is showing promising 'cognitive benefits' in the treatment of Parkinson’s. Historically, our positioning in resilient, high cash generating business models has paid off during difficult market periods.