KT&G's Overseas Upswing: "KRW 7,600 Per Share Dividend" and Profit Sharing [Stocks of the Week]

Overseas Combustible Cigarette Sales and Prices Both Rising
"lil" Drives KT&G's Domestic NGP Market Share to 48%
Upgraded Earnings Outlook and Expanded Dividends

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KT&G, long seen as a "dividend and defensive stock," is undergoing a transformation. While the domestic tobacco market has stagnated, the company has started selling more cigarettes overseas and at higher prices. With rising share in next-generation products (NGPs) as well, securities analysts are re-evaluating KT&G, no longer simply as a dividend stock but as a "growing dividend stock."

Robust Overseas Sales: Higher Volumes, Higher Prices

In the second quarter of this year, consolidated sales reached 1.7016 trillion won, up 9.9% from the same period last year, while operating profit rose 18.5% to 414.5 billion won. The tobacco segment’s operating profit increased 19% to 382.5 billion won, with the health functional food and real estate business segments growing by 61% and 16%, respectively. Ko Eun Choi, a researcher at Korea Investment & Securities, stated, "Thanks to tobacco growth, profits exceeded already high market expectations," adding, "Operating profit achieved double-digit growth for four consecutive quarters."

Notably, overseas sales of conventional cigarettes in the second quarter increased by 18.9% to 557.7 billion won. Although sales volume rose by 7.3%, the average selling price (ASP) surged by about 11%. The increase in operating profit reached 45.6%. For nine consecutive quarters, overseas conventional cigarettes have seen increases in sales volume, revenue, and profit. The expansion of high-end product lines and the effects of price hikes accelerated profit growth, outpacing revenue growth.

Hyunjeong Son, a researcher at Yuanta Securities, evaluated that overseas conventional cigarettes are becoming the company's core profit driver. Son commented, "If overseas production further increases, reducing labor and tariff costs, the potential for sustainable margin improvement will rise accordingly."

KT&G plans to raise its global production ratio to over 60% by 2028, utilizing factories in Kazakhstan and Indonesia. Localizing production reduces manufacturing costs and tariff burdens while dispersing logistics and geopolitical risks. Despite instability in the Middle East, KT&G secured alternative shipping routes and maintained sales growth in the second quarter.

The domestic tobacco market also proved more robust than expected. Sanghoon Cho, a researcher at Shinhan Investment Corp., shared, "KT&G's share of the regular cigarette market in the second quarter was 67.2%," adding, "Total demand for both regular and heat-not-burn cigarettes increased by an unusual 1.6% year-on-year."

48% Share for 'lil': Competing and Cooperating with PMI

NGPs form the other growth axis for KT&G. Domestic NGP market penetration has risen to 24%, with KT&G capturing a 48.2% share. Domestic stick sales grew approximately 21% in the second quarter. The company’s sales volume and profitability are both improving, driven by increased sales of "lil Able 3.0" and a greater share of premium-pricing dedicated sticks.

However, KT&G does not hold a monopoly in the Korean NGP market. According to Yuanta Securities, in the second quarter of this year, KT&G's share was 48.2%, while Philip Morris International (PMI) claimed 45.3%—a gap of less than 3 percentage points. A year ago, KT&G was at 45.5% and PMI at 46.0%, with PMI in the lead. The two companies are essentially splitting the market.

The two firms are both competitors and partners. Domestically, PMI's "IQOS" and KT&G's "lil" compete. Internationally, PMI is in charge of lil's distribution, marketing, and sales. In 2023, KT&G and PMI signed a long-term agreement for PMI to commercialize lil products globally through 2038, leveraging PMI’s global network to broaden KT&G’s market reach.

Among global listed tobacco companies, KT&G is most closely compared with PMI, British American Tobacco (BAT), and Japan Tobacco (JT). According to KB Securities, this year’s projected price-to-earnings ratio (PER) for KT&G is 14.1 times—lower than PMI’s 22.3 times and JT’s 18.9 times, but higher than BAT’s 12.3 times. The return on equity (ROE) for KT&G is 13.4%, compared to 16.1% for BAT and 15.0% for JT. Ultimately, to resolve valuation discounts, KT&G must grow its overseas business and narrow profitability gaps with global competitors.

Researcher Choi noted, "With differentiated product competitiveness and strong local operations, profitability is on a consistent uptrend. KT&G has raised its annual operating profit guidance for the year from the previous 6–8% growth to 10–13%. At this rate, the company could even exceed the upper end of its new target."

Earning and Sharing... From Dividend Stock to Growth Dividend Stock

Enhanced shareholder returns constitute another pillar supporting KT&G’s share price. This year's interim dividend is 2,000 won per share, up by 600 won from last year, with plans for additional share buybacks and cancellations in the second half and the announcement of a new long-term shareholder returns policy in Q4. Eun-ae Ryu, a researcher at KB Securities, stated, "A dividend-focused shareholder return policy will further stabilize the share price," estimating this year's total annual dividend per share (DPS) at 7,600 won and the total shareholder return (TSR) at around 6%.

KT&G's share price started the year (January 2) at 140,400 won (closing price), reaching 183,700 won during trading as of the previous day. Since the company's earnings release on August 6, 12 major securities firms have generally set target prices between 230,000 to 250,000 won. Seongho Park, a researcher at LS Securities, explained, "With upward earnings revisions, expectations for higher year-end dividends have risen, and there is potential for additional share buybacks depending on surplus cash." He added, "With stable profit growth and the expansion of dividend-centered shareholder returns, KT&G’s valuation discount versus global peers is being resolved."

However, there are risks. Overseas NGP sales rose 36% in the second quarter, but were partly boosted by a low base effect from last year’s device supply issues, while stick sales volume increased by only 0.5%. Declining domestic demand for conventional cigarettes, combined with sluggish overseas operations by KGC due to inventory adjustments in China, also pose challenges.

Ultimately, the key is whether ongoing growth in overseas cigarettes and NGPs continues to generate cash, which can be reinvested in dividends and share buybacks. Researcher Choi assessed, "Given KT&G’s strong commitment to enhancing shareholder value and its proven profit-generating ability, the stock remains undervalued." Thus, additional re-rating may occur if overseas expansion and increased shareholder returns further narrow profitability gaps with global peers.

This content was produced with the assistance of AI translation services.