Incorporated in 1987, Philip Morris International Inc. (PM) manufactures and sells nicotine-based products, related accessories and devices, and IQOS smoke-free products. PM’s shares have advanced 33.4% over the past year and 20.2% so far this year. The company delivered strong top and bottom-line results in its last reported quarter, driven by higher heated tobacco unit shipment volume in East Asia and Australia and favorable pricing. Since its market debut in 2008, PM has raised its annual dividend every year, amounting to a 160.9% total increase, or an 8.3% CAGR.
Tobacco companies benefit significantly from the highly addictive nature of their products. And thanks to PM’s attractive dividend yields and dividend increase history, we think it’s an ideal pick for income investors.
With the Federal Reserve’s decision to keep short-term interest rates anchored near zero and the stock market’s current fluctuations as the backdrop, we think PM could prove to be a solid bet from both stability and dividend viewpoints.
Here is what we think could shape PM’s performance in the near term:
Strong Dividend Story
PM has declared a $1.20 per share dividend for the first quarter, payable on July 12, 2021, representing a $4.80 annualized rate. The CAGR of its five-year dividend payout is 3.3%. Also, its dividend payout has grown at a 3.9% CAGR over the past three years. The company’s 4.8% forward dividend yield is 97.7% higher than the 2.4% industry average. PM’s 5.4% four-year average yield is 114.2% higher than the 2.5% industry average.
Cutting-Edge Research Could Strengthen Business
Last month, PM released a scientific update that discusses the company’s progress in the development of products that do not contain tobacco or nicotine, as well as research in areas such as respiratory drug delivery and botanical products, to encourage smokers to switch to less harmful, smoke-free products. By investing significantly in R&D and looking to contribute to various fields of science, PM has the potential to solidify its position in the market and strengthen its business.
Impressive Financials and Profitability
PM’s net revenue increased 6% year-over-year to $7.58 billion in the first quarter, ended March 31, 2021. Its operating income rose 23.5% from its year-ago value to $3.44 billion, while its adjusted operating margin came in at 46% for this period, compared to 39% in the first quarter of 2020. The company’s EPS rose 32.5% year-over-year to $1.55, while net earnings increased 32.4% from its year-ago value to $2.42 billion.
PM’s 67.6% trailing-12-month gross profit margin is 89.9% higher than the 35.6% industry average. Its EBITDA margin and net income margin of 46% and 29.7%, respectively, are significantly higher than the 14.7% and 5.3% industry averages. In addition, the company’s 21.7% ROA compares favorably with the 5.4% industry average.
Consensus Rating and Price Target Reflect Potential Upside
Of 16 Wall Street analysts that have rated PM, four rated it Strong Buy and 11 rated it Buy. The stock has a 1.5 average broker rating, indicating favorable analyst sentiment. Also, analysts expect the stock to hit $106.42 soon, indicating a potential 7% upside.
POWR Ratings Reflect Promising Outlook
PM has an overall rating of B, which translates to Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight different categories. PM has a Stability Grade of B, consistent with its relatively low beta of 0.85.
Also, in terms of Quality Grade, PM has an A. The company’s high profitability is in sync with this grade. In fact, PM has a Momentum Grade of B. This justifies the stock’s 33.4% gains over the past year.
Click here to see the additional POWR Ratings for PM (Value, Sentiment, and Growth).
The stock is ranked #6 of 11 stocks in the A-rated Tobacco industry.
If one is looking for other top-rated stocks in the same industry, with an Overall POWR Rating of A or B, one can access them here.
Bottom Line
PM has a history of paying high dividend yields to its shareholders. In fact, the company’s cash-rich core IQOS business, increased heated tobacco unit shipment volume, and solid business model support its current dividend yield. As PM continues to invest heavily in R&D to gain expertise in smoke-free alternatives and expand its business offerings, we think it is well positioned to increase its dividend payments meaningfully. Also, given the Fed’s commitment to keeping interest rates unchanged at near-zero levels, investors looking for a stable income stream should bet on PM.
PM shares rose $0.25 (+0.25%) in premarket trading Monday. Year-to-date, PM has gained 22.10%, versus a 11.74% rise in the benchmark S&P 500 index during the same period.
About the Author: Imon Ghosh
Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.
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