Philip Morris: High Dividend Stock With A Promising Outlook
Philip Morris (ticker: PM) is a tobacco company that offers a high dividend yield, a solid growth outlook, and on top of that it is trading at an inexpensive valuation. It belongs to the universe of 5%+ yielding dividend stocks.
Company Overview
Philip Morris produces and sells cigarettes, tobacco, and other nicotine-containing products. It is operating in all geographic areas except for the US, where Altria (ticker: MO) is selling cigarettes. Before the split about 10 years ago the two companies operated as one global tobacco company.
During the most recent quarter Philip Morris reported earnings per share of $1.41, an increase of 24% year over year. This strong earnings growth rate was driven by a 12% revenue increase, as Philip Morris’ top line rose to $7.7 billion.
Growth Prospects
The tobacco industry is not a high-growth industry. Cigarette consumption is falling in most countries around the globe, but luckily tobacco companies are able to increase the price per package consistently. Demand for cigarettes is very inelastic, which means that price increases do not impact demand a lot. This is how the industry has been able to grow its sales steadily over the last decades, despite smoking rates being on the decline.
Philip Morris’ legacy business (cigarettes) therefore will most likely remain a solid cash cow, where price increases will allow for a slow but steady revenue growth rate. Over the last couple of years Philip Morris has developed a promising new product. Its heat-not-burn product iQOS is a less unhealthy choice compared to cigarettes. iQOS has been successfully launched in markets such as South Korea, Japan, and several European countries, and the ramp-up of sales has been successful. iQOS sales are responsible for the majority of Philip Morris’ current double-digit sales growth rate.
Valuation, Dividends, And Expected Returns
Philip Morris is forecasting earnings per share of $4.97 to $5.02 for the current year, which would mean a growth rate of 28%-29% over 2017’s earnings per share of $3.88. Philip Morris has lowered its guidance range for this year’s earnings per share recently, but that was not due to operational problems, but rather due to the impact of currency rates. A strengthening dollar leads to weaker results for Philip Morris, as the company is only doing business outside of the US. Based on ~$5.00 in earnings per share for the current year Philip Morris’ shares are trading at slightly less than 17 times this year’s earnings.
Philip Morris offers a dividend yield of 5.4% right here, which is almost three times as much as the broad market’s dividend yield. Philip Morris has raised its dividend regularly over the last couple of years, its most recent dividend increase was a 7% hike in June.
Based on the forecasted ~6% earnings per share growth rate, a 5.4% dividend yield, and a likely immaterial impact from valuation changes (Philip Morris is trading in line with the median price to earnings ratio over the last decade), shares of the company should deliver total returns of 11%-12% annually over the coming years.
Final Thoughts
Philip Morris is a high-yielding dividend stock that has a history of regularly raising its dividend. Thanks to iQOS its growth outlook over the coming years is compelling, and shares are not looking expensive right here. It seems likely that Philip Morris will be able to deliver low-double-digits total returns over the coming years. The combination of these facts makes Philip Morris’ shares look attractive.
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