5% Yield: Philip Morris Is A Smokin' Deal In A Tricky Market

seekingalpha06-21

Philip Morris International offers a 5.1% dividend yield with a strong balance sheet and a focus on smoke-free products for growth.The company's international exposure and successful shift towards ...

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GeorgePeters Introduction Generally speaking, when a stock price history looks like this, I quickly lose interest: Data by YCharts However, when the total return (capital gains + dividends) chart looks like this, I'm interested again: Data by YCharts As the title of this article and the charts above gave away, we're talking about Philip Morris International (NYSE:PM), the spin-off from Altria (MO), which I recently discussed in this article. In this article, I refer to it as PM (its ticker) and PMI (its official abbreviation). I have to be honest that I never cared to cover the company, as I did not like its poor long-term return. However, I changed my mind. Because of the recent underperformance of value stocks and the lofty valuation of the S&P 500, investors are looking for value and income opportunities trading at an attractive price. As we can see below, \"value\" is highly attractive relative to \"growth.\"  JPMorgan  Philip Morris yields 5.1%, which comes with a stellar balance sheet and consistent dividend hikes. Although the traditional cigarette business is slowly dying, the company's international exposure and focus on successful smoke-free alternatives have provided strong growth tailwinds.  In general, I have to say that finding high-yielding stocks with safe characteristics is tough, as I like to avoid complex financial companies and businesses without moats. Philip Morris has it all. A strong legacy business, growth tailwinds in emerging markets, a successful push to smoke-free products, and pricing power. As a result, it's a holding of the VanEck Morningstar Wide Moat ETF (MOAT), where the focus is on wide-moat businesses. With all of this said, in this article, I will start coverage of the stock and explain why I consider it a great stock for income-focused investors. A Well-Diversified & Future-Focused Tobacco Producer Although PM is a rather well-known stock, as this is my first article on the company, I'm starting with a short history for new readers. Originally incorporated in 1987, Philip Morris has been independent since 2008 when it spun off from Altria. That spin-off was triggered by the decision to provide PMI with more freedom in terms of potential litigation and legislative restrictions to focus on growth in emerging markets. Since then, it has built a diversified portfolio of cigarettes and smoke-free products, including heat-not-burn (heated tobacco units \"HTU\"), vapor, and oral nicotine products. In fact, the company's slogan is \"Delivering a smoke-free future,\" which is interesting, as the company's foundation was entirely built on tobacco. Between 2008 and 2023, the company allocated roughly $12.5 billion toward the development and commercialization of these smoke-free products, building a very successful portfolio, as we'll discuss in this article. This includes the acquisition of Swedish Match AB, which is a leader in oral nicotine delivery. This deal brought together Swedish Match's ZYN brand with PMI's IQOS brand, improving PMI's smoke-free portfolio. Swedish Match Philip Morris also bought the Vectura Group in 2021, which is a company offering wellness and healthcare products that paved the way for an expansion beyond nicotine products into inhaled medicines. Vectura Group While these developments are promising, combustible tobacco still accounted for roughly 64% of last year's sales. This segment comes with brands like Marlboro, Parliament, Chesterfield, L&M, and Philip Morris, which account for roughly 79% of its cigarette shipments. Marlboro, which is the best-selling cigarette in the world, accounts for roughly 39% of its cigarette shipments. It owns five of the world's top 15 brands (two of the top three!). Philip Morris International Moreover, the company has an agreement with Altria that allows it exclusive commercialization rights of its IQOS system in the United States in exchange for $2.7 billion - as of April 30, 2024. Where's the Shareholder Value? Philip Morris may be an old business in a declining industry. However, its focus on successful traditional brands in strong markets and non-smoke alternatives has paved the way for impressive growth. In the first quarter of this year, for example, the company grew shipments by 3.6%, boosting organic revenue growth by 11.0%, operating income by 22.2%, and adjusted EPS by 23.2%. Philip Morris International As one can imagine, major growth drivers were smoke-free products. Looking at the numbers below, we see smoke-free products hit it out of the park with 22.4% growth, offsetting minor weakness in cigarettes (which continue to show strength in light of secular headwinds). Philip Morris International According to PMI, the IQOS product line showed impressive progress, with a 13% increase in adjusted in-market sales volumes and a 21% rise in total shipments. Meanwhile, the new IQOS ILUMA device has been key in this success as well, as it is now available in 64 markets and represents roughly 100% of IQOS volumes outside of Russia. ZYN volumes were up 80% in the United States. This product holds a 74.3% category volume market share and a 79.3% retail volume share. Philip Morris International Before we continue to focus on longer-term opportunities, it's impressive to see that even combustibles are still reporting positive growth, with 1Q24 net revenues rising by 3.7%, supporting the company's consistent move into alternatives. Philip Morris International The company is also growing margins, which is important, as it isn't sacrificing profitability to grow sales. Even adjusted for currency headwinds, first-quarter operating margins rose by 90 basis points to 38.2%. That number would have been 370 basis points if it weren't for unfavorable currency translations. But as you know, could have, should have, would have. Because Philip Morris is so focused on foreign markets, currency translations are always a factor to keep an eye on. Philip Morris International Speaking of foreign markets, the company's expansion into new markets is a key factor for long-term growth. According to Philip Morris, its smoke-free products are gaining rapid traction globally, including in Japan, where IQOS products now have a 29.3% market share. The same is visible in markets like Indonesia, South Korea, and others. In general, its IQOS brand is a leader in 11 markets, positioning Philip Morris at the very top for both tobacco and smoke-free products in key markets. Philip Morris International Things are going so smoothly that Philip Morris reiterated its full-year guidance during this month's Deutsche Bank Global Consumer Conference. It also raised its guidance on a currency-adjusted basis, which hints at a stronger-than-expected core business. We are reiterating this morning our guidance for growth before ForEx impact of our adjusted EPS between 9% and 11%. And we are revising upward our guidance in terms of dollar term, in term of reported growth of the adjusted EPS. We have the ForEx impact that is easing. So the headwind easing. We were previously expecting minus $0.36. And based on the [ prevailing rates ] today, we're expecting a minus $0.29, so a bit better. And that would generate a growth of the adjusted EPS between plus 4.2% to plus 6.2%. - Philip Morris Consistent mid-single-digit is fantastic news for the business, as it shows that its strategy works, and great news for shareholders, as it supports its valuation and dividend. Shareholder Value PMI is a cash cow with a healthy balance sheet. The company, which has an A- credit rating, is expected to generate $10.1 billion in free cash flow this year, potentially followed by a gradual increase to $11.5 billion in 2026 (+14%). The net leverage ratio is expected to drop to 2.5x EBITDA next year. Given that the company has a market cap of $157 billion, these numbers imply a free cash flow yield of 6.4% and 7.3%, respectively. This money is primarily used for distributions, as Philip Morris pays $1.30 per share per quarter in dividends, which is a 5.2% annualized yield. This dividend has an 81% cash payout ratio and comes with a five-year CAGR of 2.7%. The dividend has been hiked for 15 consecutive years. Data by YCharts While dividend growth is very slow (it is inflation protection at best), the dividend scorecard is good, as PMI offers a stellar high yield that I do not expect to be cut unless the company were to suddenly mess up its expansion plans in unimaginable ways. Seeking Alpha This also bodes well for its total return. Currently, the PM ticker trades at a blended P/E ratio of 16.5x, which is roughly in line with its long-term P/E ratio of 16.3x. Using the FactSet data in the chart below, the company is expected to grow its EPS by 5% this year, roughly in line with company estimates. In 2025 and 2026, growth is expected to accelerate to 9% and 10%, respectively. FAST Graphs Assuming an unchanged valuation multiple, this paves the road for a 13% annual return, including its dividend. While I cannot make the case that PM is a table-pounding must-buy stock, I like the value this company brings to the table. It has a great yield, a fantastic strategy to provide elevated growth in the tobacco industry and a healthy balance sheet that supports these dividends and potential M&A projects to bolster its product portfolio. If I were an income-focused investor with a need to increase my portfolio yield, I would be a buyer at these levels, as it's not easy to find similar low-risk, high-yield stocks. Takeaway Philip Morris has caught my attention despite its historically poor long-term capital gains. The company's 5.1% dividend yield, strong balance sheet, and strategic shift towards smoke-free products make it an attractive pick for income-focused investors. Essentially, the company's international exposure and successful push into emerging markets provide growth tailwinds, while its legacy cigarette business continues to perform well. I believe PM shares offer a compelling mix of value and income. For investors seeking high-yield income with low risk, PM is a solid buy at current levels. Pros & Cons Pros:   Attractive Yield: Philip Morris offers an attractive 5.1% dividend yield, which has a history of consistent growth since its spin-off.  Strong Balance Sheet: With an A- credit rating, PM has the financial health to support its dividend and growth initiatives.  Growth in Smoke-Free Products: PM's investments in IQOS and ZYN are paying off, driving significant growth in these categories.  Global Market Presence: PM's international exposure provides consistent growth opportunities, especially in emerging markets.   Cons:   Declining Cigarette Business: Traditional tobacco products are in decline, which poses long-term risks.  Currency Risks: PM's global operations make it vulnerable to currency fluctuations, impacting profitability.  Regulatory Challenges: The tobacco industry faces regulations and litigation risks.  Slow Dividend Growth: While the yield is high, the dividend growth rate is relatively slow, barely outpacing the Fed's 2% inflation target.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.26.4","shortVersion":"4.26.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2445761646"}