Philip Morris offers investors more than just high yields. The company’s dividends have risen consistently since its creation. Notice the beautiful stair-step pattern of the company’s dividend increases in the image below.
Philip Morris International Inc. (NYSE:PM) currently has a high payout ratio of 92%. The company has maintained a payout ratio of around 70% for much of its corporate life.
Philip Morris is able to maintain a high payout ratio and offer consistent dividend growth because of the stability of its business.
The company’s Marlboro brand enjoys excellent recognition. It is the market leader. Advertising restrictions on tobacco products help to ‘lock in’ the company’s brand-based competitive advantage. New entrants and competitors will not be able to significantly shift the balance of brand power in the tobacco industry.
Additionally, Philip Morris sells a highly addictive product that is relatively inexpensive. The company enjoys high margins. Cigarettes have an inelastic demand curve. Philip Morris can continuously raise prices in excess of inflation and its customers will keep buying.
At first glance the tobacco industry appears to be a terrible place to look for growth. It is true that cigarette volume is declining globally at around 2.5% per year.
Source: Philip Morris 2015 Morgan Stanley Conference Presentation, slide 3
Despite declines, Philip Morris is still growing its earnings-per-share. Cigarette volume declined ~2.5% in fiscal 2015 for the international tobacco industry. Philip Morris cigarette volume declined 1.0%. The company is gaining market share, which is offsetting some of the industry headwinds.
Price increases, efficiency gains, and large share repurchases are helping Philip Morris to post double-digit earnings-per-share growth on a constant currency basis. The company saw constant-currency adjusted earnings-per-share grow 12% in fiscal 2015. That is far from a declining business. The company is expecting 10% to 12% earnings-per-share growth on a constant currency basis in fiscal 2016.
The biggest issue Philip Morris International Inc. (NYSE:PM) is facing today is not the slowly declining tobacco industry. The strong United States dollar is damaging earnings in the short-term. Currencies fluctuate. When the dollar begins to depreciate versus other global currencies (and it will at some point), Philip Morris will see excellent adjusted earnings-per-share growth.
Over the long run, I expect the company to generate earnings-per-share growth in the 7% to 9% a year range. This growth combined with the company’s 4.5% dividend yield gives investors in Philip Morris an expected return of 11.5% to 13.5% a year. I expect the stock to outpace the overall market over the next decade, just as it has over the past ~7 years.
At the end of September, 42 funds among those tracked by Insider Monkey held long positions in Philip Morris International, having amassed 2.50% of the company’s outstanding stock at the end of September. Andy Brown’s Cedar Rock Capital and Tom Russo’s Gardner Russo & Gardner ranked among the top shareholders, with stakes containing 12.45 million shares and 10.48 million shares at the end of the third quarter.
